Controlled Foreign Companies - Are we nearly there yet?
On 6 December 2011, the Government published draft legislation for consultation on the proposed full reform to the controlled foreign company ("CFC") rules to be introduced in the Finance Bill for 2012.
The aim of the new rules is to move the UK towards a more territorial system, so that only foreign profits artificially diverted from the UK are subject to a CFC charge in an attempt to improve the UK’s competitiveness for multinational enterprises.
As expected, the proposals retain key features of the existing regime including applying a CFC charge to UK-resident companies holding at least a 25% interest in a CFC and excluding capital gains from the regime. Whilst the proposals contain a broader definition of what constitutes a CFC, as with the existing regime, there are a number of exemptions which would exclude a company from the application of the CFC rules.
A welcome improvement to the CFC rules is the inclusion of new profit “gateways” which limit the profits to which the CFC charge will apply and provide for mechanical safe harbours to exclude from the charge profits derived by CFCs with commercial activities and non-trading finance income. Territorial business exemptions are incorporated into these gateways which focus on the location of key management activities and are aimed at artificial diversion of profits from the UK. As expected, the Government continues to view IP and finance profits as the highest areas of risk of artificial diversion.
Whilst we would agree that the legislation should assist in improving the UK’s competitiveness by only charging UK tax on foreign profits artificially diverted from the UK, it is unfortunate that the exemptions and the gateway tests remain complex and the introduction of a number of specific anti-avoidance rules in the draft legislation will not assist companies to achieve certainty in the application of the proposed rules.
Read our detailed analysis of the proposals
Lawyers Nikol Davies, Neil McKnight, Peter Jackson, Robert Young
