The CFC rules are a complex set of anti-avoidance rules that broadly seek to attribute the income and profits (but not gains) of certain subsidiaries located in tax havens or low tax jurisdictions where that income has been artificially diverted from the UK to the UK parent or holding company. Where the rules apply, the UK parent company is subject to UK tax on the income/profits as if they had been derived in the UK.
The existing CFC regime has long been held up by taxpayers as an example of what is wrong with the UK tax system. The current rules are said to be uncompetitive, overly complex, inflexible and do not reflect modern business practice.
The Government has recently released a new consultation document which represents the latest stage in a long running reform process and sets out its latest proposals for the future CFC regime. The key features/points are as follows:
- The regime is intended to be specifically targeted at those situations that pose the highest risk of artificial diversion of UK profits.
- Foreign profits derived from genuine commercial activities carried on by the CFC should largely fall outside of the CFC charge.
- The CFC charge will be proportionate. Only those profits that are artificially diverted from the UK will fall within the CFC charge – the new regime will not taint the rest of the income/profits derived by the CFC.
- Strictly, all the profits of a CFC will be within the charge but there are several categories of exemptions which are intended to exclude all but the artificially diverted income. Of note is the new general purpose exemption which will apply where the CFC can demonstrate that its profits have not been artificially diverted from the UK. There will be no default assumption that profits would have arisen in the UK.
- Special rules will apply to finance/treasury companies and to income from IP assets.
The Government proposes that the rules will apply equally to entities resident in the EU and non-EU jurisdictions.
A link to the more detailed Herbert Smith briefing can be found at http://www.herbertsmith.com/NR/rdonlyres/AD660A86-1805-4CF7-8997-348E5284DF81/0/CFCcondocbriefing1July2011.html. The briefing contains a helpful summary of the new CFC regime.
A link to the consultation document can be found http://www.hm-treasury.gov.uk/consult_controlled_foreign_companies_reform.htm.