Since 2007, the UK government has been consulting on reforming the UK’s controlled foreign companies (“CFC”) rules, with the aim of making the UK a more attractive and competitive place for business.

The UK CFC rules are anti-avoidance provisions which are intended to prevent the artificial diversion of profits from the UK to jurisdictions with lower corporate tax rates. In broad terms, the rules operate by imposing a tax charge on UK companies in respect of the profits of their CFCs.

In June 2011, the government published a new consultation document on the reform of the CFC rules and stated that “a key ambition to help achieve this [encouraging private sector investment and growth] is to create the most competitive tax system in the G20. As well as lowering corporation tax rates, the Government wants to make the UK the best location for corporate headquarters in Europe.” The amendments to the rules have in part been prompted by the high-profile relocations of the headquarters of a number of insurance groups away from the UK.

Interim improvements to the CFC rules are contained in the recently published Finance Act 2011. The full regime is intended to come into force next year when the Finance Bill 2012 receives royal assent.

Following the publication of the interim improvements in the Finance Act 2011, Lancashire, the London-listed Bermudan reinsurer, announced on 27 July 2011 that it intended to move the tax residence of its holding company from Bermuda to the UK. The announcement was prompted by the introduction of a statutory exemption for foreign subsidiaries which, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime for the first time. Lancashire’s Bermudian (and other non-UK) subsidiaries will, for a period of three years, remain outside the scope of the CFC rules, meaning that there will be no effect on Lancashire’s UK tax liability. However, the change of tax residency gives the Lancashire board of directors greater operational flexibility, since they are no longer required to fly to Bermuda for board meetings.

It remains to be seen whether Lancashire’s announcement will prompt other previously UK-headquartered groups to move back to the UK. This is certainly what the UK government is seeking to achieve.