ACCA Advanced Taxation (ATX) Practice Exam

What is the primary difference in capital gains computation for an overseas branch compared to an overseas subsidiary in the UK?

1. Overseas branch follows UK rules, while subsidiary does not

2. Overseas subsidiary follows UK rules, while branch does not

3. Both operate under the same UK rules

4. Overseas branch has more capital gains exemptions

The correct answer is: Overseas branch follows UK rules, while subsidiary does not

The primary difference in capital gains computation for an overseas branch compared to an overseas subsidiary in the UK stems from the way each is treated for tax purposes. An overseas branch is considered part of the UK entity for tax purposes and, consequently, is subject to UK tax rules. Specifically, the income and capital gains of the branch are taxed based on the UK taxation system. On the other hand, an overseas subsidiary is treated as a separate legal entity. It follows the tax regulations of the country in which it operates, and the potential capital gains or profits it generates may not directly be taxed by the UK authorities unless certain conditions are met, such as repatriation of those profits to the UK. This difference in treatment leads to variations in capital gains computation, as capital gains from an overseas branch will be computed according to UK standards and taxed accordingly, while the overseas subsidiary's gains are subject exclusively to the tax regulations of its own jurisdiction, thereby not directly impacting the UK's tax computation unless certain conditions are triggered. This understanding clarifies why the overseas branch follows UK rules for capital gains computation while the overseas subsidiary does not.