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Government Issues New Consultation on Controlled Foreign Companies Reform

UK
11 Jul 2011

The UK Government has published its proposals for reforming the Controlled Foreign Company (CFC) regime. Together with the reduction in the main rate of corporation tax which was announced in Budget 2011, the proposals aim to make the UK a more attractive and competitive location for multinational businesses. Taxand UK looks at the new proposals and how they may encourage more companies to do business from the UK.

The new CFC regime will be targeted at situations which pose the highest risk of artificial diversion of UK profits. It will operate in a similar way to the current regime, by identifying foreign companies controlled from the UK which are subject to a lower level of tax and then providing a number of exemptions to remove those companies which do not create an artificial diversion of profits. Where a CFC charge does arise it will be proportional to the UK profits that have been artificially diverted from the UK.

The proposed exemptions set out in the consultation are:

  • low profits exemption
  • excluded countries exemption
  • temporary period exemption
  • territorial business exemptions
  • finance company partial exemption
  • general purpose exemption
  • sector-specific rules for insurers and banks.

The full consultation document extends to 110 pages and is open for comment until 22 September 2011. The new rules could become effective for accounting periods beginning on or after the date on which Finance Bill 2012 receives Royal Assent.


Taxand's Take


All UK companies with overseas subsidiaries or exempt foreign branches (i.e. where the UK parent has elected to apply the new branch exemption) may be affected by the Government's proposals.

The proposed exemptions are wider reaching and therefore likely to exempt a greater number of CFCs from the regime than the current rules, which could allow companies more flexibility to structure their international operations. This, together with the reduced main rate of corporation tax, may encourage more companies to do business from the UK.

However, although the Government aims to make the new CFC rules as straightforward as possible, the proposals are more complex than the current CFC regime and consequently may increase the burden of compliance on UK companies. In particular the rules for CFCs engaged in financing or IP exploitation could prove difficult to administer.

Read more on CFCs: Finnish CFC Legislation and the Impact of Taxation for Multinationals

Your Taxand contacts for further queries are:
Stephen Machin
T. +44 (0)207 715 5201
E. smachin@alvarezandmarsal.com

Rachel Elvin
T. +44 (0)207 072 3241
E. relvin@alvarezandmarsal.com

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Taxand's Take Author