Under current law, a Controlled Foreign Company (CFC) is an overseas company controlled by United Kingdom residents which pays less than three quarters of the tax which it would have paid on its income had it been resident in the UK. The controlled foreign companies’ provisions are directed at companies which artificially divert UK profits to low tax territories or other favourable overseas tax regimes to reduce their UK tax liabilities.
The Government has been going through a consultation process to reform that CFC tax rules and on 31 January 2012 and 29 February 2012 published updates on the CFC reform as well as updated draft legislation for consultation. The Treasury has acknowledged the need for further amendments to the draft legislation and is working with businesses and advisers to achieve final legislation.
The key points arising from the recent consultations are as follows:
Finance company partial exemption
The most attractive feature of the new regime is the opportunity for certain finance profits to benefit from a low tax rate of 5.75%. A limited full finance exemption is proposed where the CFC’s interest income exceeds the aggregate borrowing costs of the UK group or for interest income that arises from certain transactions (such as share issues) that place no reliance on the wider group.
Application of the new CFC rules to the financial sector
The current proposal is to have an insurance safe harbour of between 200% and 250% of minimum regulatory capital, and a banking safe harbour limit of the greater of a 12.5% Tier 1 capital ratio, and the level of Tier 1 capital that the bank would be required to hold if regulated in the UK plus a 2% buffer. These proposals will be subject to continuing discussions with the insurance and banking sectors and draft regulations will be published in due course.
The Gateway Test
The Gateway is intended as a simple test to allow groups to identify whether they are within the scope of the CFC rules. In response to the recent consultations, the Gateway has been improved to include an introductory chapter which gives 3 conditions to allow groups and their foreign subsidiaries to identify more easily whether or not they are within the scope of the rules. Where any of the conditions are met, a CFCs business profits will be outside the scope of the new regime.
Temporary Period of Exemption
It is proposed that where a UK group acquires foreign subsidiaries or a non-UK group moves to the UK, the group will be given a period of time to restructure the foreign subsidiaries so that they fall outside the CFC rules.
Foreign Branches
The new CFC regime will also apply to foreign branches of UK resident companies. For CFC purposes the branch will be treated as if it were a subsidiary of a UK company.
Commencement
The new rules will apply to accounting periods beginning on or after 1 January 2013. The Government is continuing to consider consultation responses on the draft legislation and any changes resulting from this continuing work will be included in the Finance Bill published on 29 March 2012.
For further information/advice on this topic please visit www.wardwilliams.co.uk
The Government has been going through a consultation process to reform that CFC tax rules and on 31 January 2012 and 29 February 2012 published updates on the CFC reform as well as updated draft legislation for consultation. The Treasury has acknowledged the need for further amendments to the draft legislation and is working with businesses and advisers to achieve final legislation.
The key points arising from the recent consultations are as follows:
Finance company partial exemption
The most attractive feature of the new regime is the opportunity for certain finance profits to benefit from a low tax rate of 5.75%. A limited full finance exemption is proposed where the CFC’s interest income exceeds the aggregate borrowing costs of the UK group or for interest income that arises from certain transactions (such as share issues) that place no reliance on the wider group.
Application of the new CFC rules to the financial sector
The current proposal is to have an insurance safe harbour of between 200% and 250% of minimum regulatory capital, and a banking safe harbour limit of the greater of a 12.5% Tier 1 capital ratio, and the level of Tier 1 capital that the bank would be required to hold if regulated in the UK plus a 2% buffer. These proposals will be subject to continuing discussions with the insurance and banking sectors and draft regulations will be published in due course.
The Gateway Test
The Gateway is intended as a simple test to allow groups to identify whether they are within the scope of the CFC rules. In response to the recent consultations, the Gateway has been improved to include an introductory chapter which gives 3 conditions to allow groups and their foreign subsidiaries to identify more easily whether or not they are within the scope of the rules. Where any of the conditions are met, a CFCs business profits will be outside the scope of the new regime.
Temporary Period of Exemption
It is proposed that where a UK group acquires foreign subsidiaries or a non-UK group moves to the UK, the group will be given a period of time to restructure the foreign subsidiaries so that they fall outside the CFC rules.
Foreign Branches
The new CFC regime will also apply to foreign branches of UK resident companies. For CFC purposes the branch will be treated as if it were a subsidiary of a UK company.
Commencement
The new rules will apply to accounting periods beginning on or after 1 January 2013. The Government is continuing to consider consultation responses on the draft legislation and any changes resulting from this continuing work will be included in the Finance Bill published on 29 March 2012.
For further information/advice on this topic please visit www.wardwilliams.co.uk
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