UK and International Tax news
Monday 20th February 2012
On 6 December 2011 HMRC published the document Controlled Foreign Company (CFC) Reform – response to consultation which set out how the proposals for CFC reform had developed in the light of the consultation over the summer and autumn. Draft legislation for most of the new CFC rules was published at the same time.
On 31 January 2012 HMRC issued an update on the initial feedback received on the proposals and draft legislation and how the Government intends to respond. It also set out further proposals on the finance company rules, the application of the CFC rules to exempt foreign branches, the temporary period of exemption, commencement provisions and further details on how the new rules will apply to the financial sector.
The draft legislation has now been updated to include the rules applicable to exempt foreign branches and amended rules for the treatment of finance profits. The remainder of the draft legislation is as originally published and therefore does not yet reflect more recent changes or other feedback received during consultation. HMRC has also issued a guide to the additional draft legislation that has been published.
With regard to the new finance company regime, the Government has identified two circumstances in which full exemption will be offered for profits to which the new rules apply. Firstly, the total CFC charge arising from partially exempt loan relationships will be limited to the aggregate net borrowing costs (calculated before taking account of any CFC charge) of the UK members of the group. Secondly, the finance profits arising from a loan which is made without reliance on wider group funds (for example as a consequence of a share for share exchange or a rights issue) will also be exempt.
In addition, in accordance with the aim of targeting the rules on artificial diversion of UK profits, a loan which ‘pulls up’ foreign external debt to the UK with the purpose of creating a UK tax deduction will be excluded from the definition of loans that qualify for full or partial exemption. This is intended to be a carefully targeted restriction will not affect entitlement to partial exemption for loans made by a CFC for reasons other than the tax-driven replacement of existing foreign external debt.
The expectation is that the treatment of the majority of loans that fall within the finance company rules will be unaffected by either full exemption or the restriction.
The working assumption has been that the new CFC rules would apply to accounting periods beginning on or after the date that Finance Bill 2012 receives Royal Assent. For groups with the most common year end, 31 December, this effectively means a start date of 1 January 2013. Against this background, the Government has been considering a number of relevant factors including interest from business in early access to the finance company rules, access to the existing TPE and the advantage of providing sufficient preparation time for business, advisers and HMRC. The Government is proposing that the new CFC rules should apply to accounting periods beginning on or after 1 January 2013. The commencement rule will operate by reference to the accounting period of the CFC rather than of the UK controlling company, which will mean that application of the new CFC rules need not be restricted by reference to the UK group’s accounting date. This is subject to the exception mentioned above in respect of companies using the existing TPE, and to specific provisions which will align the commencement of CFC reform and the new life insurance regime.Contact Us