Will CFC changes stop corporate migrations?

01 Jul 2011 | Newsletter/briefing

The principal driver that pushed many UK multinationals to consider leaving the UK in the last few years was the UK's controlled foreign company ("CFC") rules. The Government has now published its further thinking on how these rules might be reformed to support the UK's claim that it is "open for business" and an attractive location to base multinational activities.


The UK's CFC rules seek to tax UK companies on the undistributed profits of overseas subsidiaries in low tax jurisdictions. UK based multinationals have long been critical of these rules because:

  • their scope goes beyond restricting the artificial diversion of profits from the UK;
  • UK multinationals struggle to compete on a level playing field with non-UK competitors;
  • the complicated rules represent a significant compliance burden; and
  • the current regime is contrary to EU law.


The new regime follows the same structure as the existing regime, but there are a number of key changes that will make it more palatable to UK multinationals. For example, there will be specific exemptions for companies carrying on a manufacturing trade and a general exemption for commercial activities where there is a low risk of artificial diversion of profits from the UK. In addition, the old "motive test" (which was almost impossible to satisfy) will be replaced by a more general purpose exemption.

A new regime for offshore finance companies is also proposed, which will give rise to an effective UK corporation tax rate on profits from overseas intra-group financing of 5.75% by the year 2014 (allowing for the reducing rate of corporation tax). This will enable UK multinationals to take advantage of the low tax regimes for finance activities in countries such as Belgium, Luxembourg and Switzerland.

Similarly, offshore companies which hold valuable IP should fall within the CFC exemptions where there is no significant risk to the UK tax base. The CFC rules may continue to apply to:

  • IP transferred from the UK in the last six years;
  • IP where more than 50% of business expenditure was incurred in the UK or more than 20% of gross income is from the UK; and
  • passive ownership of IP.

The proposed regime is certainly a move in the right direction, and will hopefully mean that, when combined with other changes such as a "patent box", multinationals will no longer need to consider leaving the UK in order to remain competitive.


Sara Luder (partner)

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