The Government has published the much anticipated consultation document which sets out its latest proposals for the future controlled foreign company (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.
- CFCs that carry on genuine activities but which also receive profits that the Government considers to be artificially diverted from the UK will be within the CFC charge but broadly only on the proportion of profits that are artificially diverted from the UK. Some exemptions will apply to exempt the entirety of the CFCs profits.
- 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 modification to the 'motive test' – this will be replaced by a new general purpose exemption which will apply to exempt a CFC's profits from a UK CFC charge where the CFC can demonstrate that those profits have not been artificially diverted from the UK. It is intended to operate 'flexibly'. There will be no default assumption that profits would have arisen in the UK.
- A finance company exemption will be introduced which will (in most cases) bring 25% of overseas intra group finance income into the UK CFC charge. It is possible that a full exemption may apply in limited cases.
- Much attention has also been paid in the consultation process to the treatment of intellectual property (IP). The treatment of these assets under the current regime was considered highly problematic. In relation to IP related activities, the new CFC regime will be targeted at 'high risk' situations where (i) IP which was developed in the UK is subsequently transferred to a low tax jurisdiction, and (ii) IP is located in a low tax jurisdiction but significant amounts of activity to maintain and/or generate the value of that IP are undertaken in the UK. The proposals aim to exempt lower risk CFCs that hold IP. For higher risk situations a flexible exemption will need to be considered to determine whether the CFC profits have been artificially diverted from the UK.
- The Government proposes that the rules will apply equally to entities resident in the EU and non-EU jurisdictions.
- The impact assessment indicates that the proposals will cost the Exchequer £2.3 billion over the life of the Parliament and approximately £840 million a year thereafter.
An overview of the proposed regime can be gleaned from our flowchart which can be found here.
It is proposed that the new regime will come into effect for accounting periods beginning on or after the date that the Finance Bill 2012 receives Royal Assent (likely to be June / July 2012).
A link to the consultation document can be found here. The responses to the consultation are due by 22 September.
Our client briefing provides a more detailed overview of the more important aspects of the proposed regime and can be found here.