HM Treasury has now produced more details regarding what will and what will not be dealt with as a part of the interim reform to the CFC legislation proposed to be included in Finance Bill 2011 next year. A timetable has also been published.
An overhaul of the UK’s CFC legislation has been long awaited, and continues to be consulted upon as part of the ongoing consultation on the UK taxation treatment of the foreign profits of UK companies. Some changes were introduced by Finance Act 2009, which included the phasing out of the acceptable distribution policy exemption to the CFC rules (to coincide with the introduction of the distribution exemptions) and the superior holding company exemption. While an entirely new code on CFCs is expected in Finance Bill 2012, the Government is continuing to consult in relation to further interim changes in the CFC legislation to “ease” the operation of the rules in certain areas.
A discussion document was issued in January 2010 setting out proposals for the new CFC regime including:
- retaining a primarily entity-by-entity based regime but introducing new rules to allow for certain income streams to be separately identified and taxed differently (in effect leading to a hybrid system);
- retaining an exemption-based system of CFC taxation;
- a possible replacement to the “lower level of tax” test;
- a redesigned motive test to exclude “genuine trading activities” from the ambit of the CFC regime; and
- new provisions relating to intellectual property and monetary assets (possibly including a treasury company exemption and a potential new tax charge for the transfer of intellectual property offshore).
A stakeholder event was held at the Treasury on 23 February 2010 at which HMRC expressed the hope that some changes would be included in Finance Bill 2011 with proposals being published in Autumn 2010.
Outline of interim proposals
The broad outline of the changes is still quite unclear. It seems that the Treasury is considering excluding what it terms “commercially justified activities” (being activities which do not erode the UK tax base but which would give rise to the CFC charge under the current rules) from the scope of the CFC rules. This would seem to suggest that the Treasury are looking at widening the definition of “exempt activities” set out at Part II of Schedule 25 of ICTA 1988 but, as was suggested at the stakeholder event on 23 February 2010, this may also involve a review of the “motive test” and moving away from the presumption that activities of CFC’s could be moved to the UK. HM Treasury give the example of a UK group which restructures its overseas operations by transferring a profitable non-UK business from one territory to another as being the type of transaction which should not be generally brought within the CFC regime.
HM Treasury are also looking at extending the scope of the “period of grace” currently available for UK companies which acquire an overseas group. This would involve extending both the length of the period of grace given (which is usually only until the end of the first full accounting period of the parent following acquisition) and the circumstances for which a period of grace may be given. Currently those circumstances only expressly encompass the purchase by a UK group of an overseas group (in order to allow a period in which the group can be restructured). However, HMRC have been known to exercise discretion in granting periods of grace in analogous circumstances where a non-UK group of companies is migrated to the UK as part of a restructuring or reorganisation. It appears to be these kinds of transactions which HM Treasury wishes to facilitate. Indeed, the suggestion that transactions which do not “erode” and “have no impact on the UK tax base” should fall outside the CFC rules is good news and may evidence a desire to definitively exclude overseas subsidiaries from the scope of the rules where the subsidiaries have not previously been controlled from the UK (such as where there has been a takeover by a UK company or group or where a group parent has migrated its tax residence to the UK).
Although there is not much detail beyond this, it is clear that HM Treasury are continuing to consider any worthwhile improvements that could be made in the interim under Finance Bill 2011. This also extends to what is proving to be one of more controversial areas of the consultation, that of intellectual property. While addressing the treatment of intellectual property of CFCs will largely be deferred until Finance Bill 2012, HM Treasury will listen to proposals for amending the legislation in the meantime to allow transactions in intellectual property which do not erode the UK tax base. However, this will not be the case for monetary assets and interest income, the treatment of which will be left for final resolution as part of the new regime anticipated in Finance Bill 2012.
Working group meetings are taking place throughout August and September 2010 with further open events anticipated for September or October. Draft legislation is expected in October or November after which there will be a further open event.