CFC rules could contravene EU law

THE GOVERNMENT'S reforms to controlled foreign companies (CFC) legislation might not make them compatible with European Union law, experts have warned.

A consultation document released yesterday fleshed out the details behind the reduction in the tax charge on overseas profits for finance companies to 5.75%. Its aim was to "improve the competitiveness of the UK corporate tax system and protecting the UK tax base against avoidance". It would do this by exempting foreign profits where there is no artificial diversion, not taxing profits where they arose from genuine economic activity and targeting "artificially diverted UK profits".

Gary Richards, tax partner at Berwin Leighton Paisner, said that the final point could be contentious: "One issue which remains is whether HMRC's view that EU law permits a UK tax charge on artificially diverted profits is right, or if even these reforms may yet be open to challenge."

The reforms were broadly welcomed by the profession. Barry Murphy, a partner at PwC, said the reforms "delivered" on the government's promise to business. He added that "it will be critical" that the measures meet EU criteria and it is likely this will be the "focus of discussions over the coming weeks and months".

The European Commission has previously criticised the UK for failing to take into account European case law surrounding freedom of establishment and free movement of capital.

There was also some concern over intellectual property taxation. Murphy said: "It's not all good news because there is clearly a way to go in working out a satisfactory regime for intellectual property; the policy on the treatment of some common operations such as procurement operations, leasing, captive insurance companies and treasury companies leaves concerns."

Simon Palmer, international tax partner at KPMG in the UK, said the position of intellectual property used overseas looks "problematic". He higlighted that the rules look as if they will "increase the compliance burden" for consumer goods businesses and other heavy users of intellectual property.