No aspects of today’s budget announcement appear to impact upon EU or cross-border claims. The changes to the law with an EU dimension are consistent with previous announcements by the government. A short summary follows.
Interim CFC Reform
As previously proposed as part of a consultation document on CFC reform published on 29 November 2010, the government has announced interim CFC changes which:
- introduce an exemption for intra-group transactions where there is limited connection to the UK;
- introduce an exemption for CFCs holding IP where the IP and CFC have limited connection to the UK;
- introduce a 3 year exemption for foreign subsidiaries which, as a result of reorganisation or changes to UK ownership, come within the CFC charge;
- introduce an alternative de minimis exemption;
- extend the current transitional rules relating to superior and non-local holding companies to July 2012.
Foreign Branch Reform
Following the draft proposed legislation announced 9 December 2010 (with relatively minor changes), the Finance Bill 2011 will contain provisions allowing a UK company to irrevocably elect that all profits arising from foreign branches are exempt income for UK tax purposes. This includes any capital gains made by the foreign branches. Once the election is made, no relief is available for foreign branch losses.
Full CFC Reform (2012) - Finance Company Partial Exemption
In addition to the interim measures adopted, the government affirmed its intention to introduce fuller reforms to the CFC regime in the 2012 Finance Bill. As previously announced, the new regime will move to an entity-based system designed to operate in a more territorial way.
Amongst the proposals in the budget is a partial exemption for finance companies that would result in an effective tax rate of one-quarter on profits arising from overseas group financing activities.
A consultation document will follow in May 2011.
Amendments to Tax Treatment of Financing Costs and Income (2012)
Further consultation on the Debt Cap rules will be undertaken in 2011, with a view to publishing draft legislation in autumn 2011 for inclusion in the Finance Bill 2012.
The government has said this consultation is undertaken with an aim to allowing businesses to more easily apply the Debt Cap rules.