 Proposals for CFC reform
HM Treasury and HMRC published a consultation document on 26 January 2010 relating to ongoing proposals for the reform of the controlled foreign companies (CFC) legislation. Based on the proposals, it appears that the CFC rules are likely to operate in broadly the same way as they do currently, but with some changes introduced in order to better achieve the Government’s stated aims and objectives.
Significant emphasis would be placed on a redesigned exempt activities test which is intended to exempt genuine trading activities from the rules where there is little or no risk of erosion of the UK tax base. Whilst it is intended that the profits of such companies would be exempt from a CFC charge, a charge may apply to ‘passive’ income earned by such companies where this is not incidental or ancillary to the company’s main activities.
It is anticipated that there will be separate rules for finance and treasury companies, reinsurance and property subsidiaries and those holding group intellectual property outside the UK. In each case, specific rules have been proposed to help determine to what extent overseas profits from these functions are attributable to the UK.
Going forward, there will no longer be an assumption that activities are being carried on offshore for the purpose of avoiding UK tax. Indeed, it has been stated that the Government intends to take a pragmatic approach to ensure that the new regime is no more restrictive than the current one.
Many of the existing exemptions may also be simplified so that they are easier to understand and apply. For example, the current CFC rules only apply where the overseas company concerned suffers a ‘lower level of tax’. This is determined by comparing the actual tax liability in the territory where the company is resident with the tax it would have suffered in the UK, having recomputed profits under UK
tax law principles. A proposed new exemption would instead involve a comparison of the tax rates and rules in the UK and the host territory. It has been indicated that this new test would also allow the ‘excluded countries list’ to be repealed.
Draft legislation is expected to be published later in 2010 with a view to legislating in Finance Bill 2011. Comments on the proposals are invited until 20 April 2010 – for more information, see http://digbig.com/5bbdjj
|