New CFC Rules
From 1 January 2013 the UK will replace its existing controlled foreign company (CFC) rules with a more limited regime which is intended to improve the UK's international competitiveness as the best location for corporate headquarters in Europe.
The new CFC rules provide opportunities for UK and international groups to efficiently manage their cross-border business, without CFC charges arising by utilising offshore finance company structures (Finco structures). Such structures could be used as part of intra-group funding arrangements which comply with the new Finance Company Regime and may:
- reduce overall financing costs; and
- provide corporate groups, who may have complex structures in place to mitigate the existing CFC regime, with an opportunity to simplify existing arrangements.
Compared with structures established under the current CFC rules, certain UK tax advisers and commentators have stated that FinCo structures will be relatively low-risk given that the FinCo regime is one which the UK government has enshrined in legislation. As CFC rules remain complex in nature, this assumes that relevant conditions will be met. Specialist UK tax input will continue to be key in this kind of planning.
Finance Company Exemption
The FinCo regime is based on the finance company exemption in the new CFC rules that provide a partial exemption resulting in an effective rate of tax of 5.5 per cent on finance profits from overseas intra-group financing. However, where qualifying loan relationships (QLRs) are funded by a Finco out of qualifying resources (eg. loans funded from external share issues or profits generated in the territory in which the ultimate debtor is resident), relevant FinCo profits are fully exempt.
In other words, groups based in the UK will be able to set up finance companies in Jersey to lend to foreign subsidiaries and suffer UK tax on the interest income at an effective rate of 5.5 per cent or be completely exempt from tax.
Criteria: Finance Company Exemption
The finance company exemption will apply where:
- a Finco's non-trading finance profits include profits from QLRs
- the Finco has business premises in its territory of residence which are, or are intended to be occupied and used with a reasonable degree of permanence and from which the Finco's operations in that jurisdiction or territory are wholly or mainly carried on; and
- a claim for the exemption is made to HMRC within 12 months of filing date of a relevant UK tax return.
HMRC has acknowledged that the management of monetary assets by a finance company may not necessarily require significant substance. Practically-speaking, where the activities of a Finco maintaining a small number of loans is not significant and the business premises will not be used every day or even for days at a time, HMRC has issued guidance that a Finco having access to those premises when it needs to and such access is assured over a 12 month period will be sufficient.
Where activities of a Finco are undertaken in the Finco's territory of residence they must, in the main, be undertaken from its business premises.
Whilst it is not an absolute requirement under the new CFC rules, an individual employed by the Finco is likely to provide additional comfort toward complying with the business premises condition rather than using the services of a third party. If the Finco's activities are undertaken in the UK by UK finance personnel of the group, the business premises condition is unlikely to be met.
Advantages of Using a Jersey FinCo
There are a number of commercial and structural benefits of using a Jersey company in CFC FinCo structures. The reasons why Jersey will work well for certain groups with QLRs are summarised below.
- Good availability of office space & appropriately qualified staff.
- Jersey has many existing companies which utilise office space and part-time employees.
- Track record
As a reputable finance centre with the highest regulatory standards, finance professionals in Jersey have provided services of the kind required for a Finco to qualify for the finance company exemption for a number of years.
- No specific local tax clearances or rulings need to be obtained.
- Low set-up and on-going administration costs.
The cost of establishing and maintaining a Jersey FinCo is generally lower than the formation of similar vehicles in other European jurisdictions such as Belgium or The Netherlands).
- No tax leakage
Jersey companies are generally not obliged to make any deduction on account of any Jersey tax from any interest payments made by the Jersey company and there are no specific transfer pricing or thin capitalization rules in Jersey. It would not be usual to seek a tax ruling in Jersey for this type of entity.
- Easy capital extraction
Distributions from a Jersey company may be made out of any profit and loss or capital account of the company, other than the capital redemption reserve or the nominal capital account. Rules around redemption and repurchase of shares are also straight forward.
- Limited local compliance requirements
Setting up a Jersey FinCo to comply with the CFC business premises condition involves obtaining only one straight-forward Regulation of Undertakings Consent which is required for businesses establishing a presence in Jersey.
- There are no Jersey-specific CFC rules.
Double Taxation Agreements
It should be noted that, unlike the UK, Jersey lacks a network of double tax treaties and thus has no material treaty-shopping provisions. This may restrict the ability to structure a deal to obtain tax benefits if, for example, QLRs suffer foreign withholding tax.
Ogier is able to offer a coordinated and cohesive approach to the provision of integrated legal and fiduciary services to UK and international groups looking to implement FinCo finance structures (fully or partially exempt).
We have particular offshore planning and implementation expertise, having worked alongside UK tax planning experts for a number of years. We have advised on and assisted with the implementation of various structures designed to create substance in Jersey through the use of our offices and employees.
This means that specialist legal and company administration teams are able to assist with FinCo structuring solutions. Ogier's full service offering is delivered seamlessly, often with a single point of contact by,
Ogier Fiduciary Services (OFS) providing:
- company formation services
- cubicle office or dedicated-desk business premises
- delegated employee services
- administration services
- offshore director and company secretarial services; and
- accounting functionality
Ogier Jersey Legal providing:
- corporate/finance legal advice
- assistance with local regulatory (Regulation of Undertakings) consents; and
- assistance with local property and employment matters.
The use of FinCo structures in compliance with the new CFC rules is an opportunity for additional tax efficiency to be achieved by a low cost method which is specifically enshrined in UK legislation.
It is expected that this will minimise UK tax risk to corporate groups in setting finance planning objectives, whether to implement a new FinCo structure or refinance and simplify existing intra-group CFC financing arrangements.