CFC reform - further update

HMRC has published further details on the controlled foreign company tax reforms, including some of the draft legislation that was omitted from the draft published in December. The key highlights are:

THE GATEWAY TEST:

The Government acknowledges that this is currently too complicated and does not enable businesses to determine with sufficient certainty whether or not a foreign subsidiary is potentially within the scope of the rules. Further legislation will be published in due course.

TAARS/COMPLEXITY:

HMRC acknowledges the concerns that have been expressed about the complexity of the excluded territories exemption and also the various targeted anti-avoidance provisions that litter the legislation. At the same time, however, a new TAAR has been inserted to prevent groups replacing foreign external debt with debt that potentially falls within the finance income exemption!

EXEMPTION FOR FINANCE PROFITS:

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. These latter rules look at first sight to be too complicated to be easily applicable in many situations, because of the need to trace the source of the funding. The application of the full/partial exemption is also being extended to a limited extent to financial traders.

FOREIGN BRANCHES

The new CFC regime will also apply to tax exempt foreign branches of UK resident companies. For CFC purposes the branch will be treated as if it were a subsidiary of a UK company. We still await the draft legislation to extend the finance income exemptions to such branches.

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 12 months (or possibly longer) to restructure the foreign subsidiaries so that they fall outside the CFC rules. If such restructuring is successful, the CFC rules will never apply. Otherwise the CFC rules will apply from the date of acquisition/migration.

COMMENCEMENT

The new rules are now not likely to apply until the first accounting period of the foreign subsidiary commencing on or after 1st January 2013, which may be a disappointment to some.

See also:

CFC reform: a Gateway update - Mar 2012

CFC Focus - CFC reform and the EU - March 2012

CFC reform - has the UK got it right? - Dec 2011

Sara Luder (partner)