The CFC consultation - The latest step on the road to reform
After some four years since the process for the reform of the controlled foreign company ("CFC") rules commenced, the Government finally published on 30 June 2011 the Stage 2 consultation document which details how the CFC regime is to operate in future.
The fundamental premise behind the reforms is to move to a more territorial tax system for the taxation of foreign profits, focussing on taxing profits economically derived from UK activity rather than from worldwide business. The full reforms continue to focus on areas where the perceived scope for diversion of profits from the UK is greatest, being CFCs holding IP assets and monetary assets.
The new regime will retain many features of the existing regime, applying to UK companies holding at least a 25% interest in a CFC, irrespective of whether the CFC is located in the EU or elsewhere. It will apply to a CFC that is subject to a lower level of tax on its taxable profits but capital gains of the CFC will continue to be outside the scope of the rules. Whilst some of the existing exemptions are essentially retained, there are new territorial business exemptions and a general purpose exemption which will replace the existing motive test.
Although there remain a number of areas where further clarification is needed, the proposals represent an improvement on the existing regime and should provide greater certainty as to the application of the rules. Even where a UK company does not qualify for exemption from the rules, it is expected that, save in certain perceived high risk areas, the rules will reduce CFC charges as they will only apply to that proportion of profits treated as artificially diverted from the UK and should only operate to bring into charge up to one quarter of the finance income arising to a CFC at standard corporate tax rates.
There are also specific exemptions related to insurance and banking business and the consultation outlines the intended alignment of the tax treatment of exempt foreign branches and foreign subsidiaries by applying the CFC rules to exempt foreign branches. However, the Government is not proposing to extend the finance company rules to branches of UK companies at this time. The consultation also proposes to enable transparent entities, such as US limited liability companies, which are used for genuine commercial reasons, to qualify for various exemptions from the CFC rules.
The consultation period will run to 22 September 2011. The aim is to publish draft legislation this Autumn with legislation enacted in Finance Act 2012. The Government considers that the new rules are likely to apply for accounting periods beginning on or after the date of Royal Assent to the Finance Bill 2012.
For further information, please:
Read our detailed analysis of the consultation document
Read the consultation document
Lawyers Nikol Davies, Michelle Williamson
