The European Union has told the UK to change two pieces of tax legislation on the transfer of assets to non-UK resident companies or further action may be taken to force compliance.

The European Commission has warned the UK that unless the discriminatory legislation is dealt with, it could face being taken to the European Court of Justice. The Commission believes that two pieces of UK legislation are out of line with the principles of the EU single market since investments outside the UK are more heavily taxed than domestic investments.

One infringement relates to the UK's "transfer of assets abroad" legislation under which a UK resident who invests in a company incorporated in another EU member state by transferring assets to it is then subject to tax on the income generated by the company. However, if the same individual invested the same assets in a UK company, only the company itself would be liable for tax.

In the second piece of disputed legislation, if a UK company acquires more than a 10 percent share of a company in another EU country, and the latter company realizes capital gains from the sale of an asset, the gains are immediately attributed to the UK company, which becomes liable for corporation tax on these capital gains. If, on the other hand, the UK company had invested in another UK resident company, only the latter would be taxable on its capital gains.

The Commission believes that both restrictions are disproportionate and go beyond what is reasonably necessary to prevent tax abuse or tax avoidance. The UK has two months in which to respond before the Commission can take the investigation to the next stage.