The Revenue said its measures – widely forecast before the Budget – would stop ‘a wholly artificial tax avoidance scheme’.
The rules governing controlled foreign companies – namely those not resident in the UK but controlled by individuals or companies that are – are designed to stop UK companies avoiding UK tax by diverting income to subsidiaries situated in low tax regimes.
Essentially the rules ensure UK parent companies of CFCs are charged an amount equal to the profits that would otherwise avoid tax.
However the Revenue said many companies had entered into artificial tax avoidance schemes designed to benefit from an ‘acceptable distribution policy’ exemption, which removes the clause if dividends accounting for at least 90% of company profits are paid to persons in the UK.
These schemes usually involve money going round in a circle from a UK financial concern, such as a bank, to a CFC owned by one of its UK clients and then back to the bank again. The cycle can effectively remove a tax liability.
Today’s move provides that dividends paid by a CFC to UK companies that can offset losses in this way (often banks or insurance companies) do not count towards the ADP exemption if they are involved in a UK tax avoidance scheme.
But the Revenue also acknowledged that existing rules were too tough on some companies that are controlled through a chain of one or more foreign holding companies.
Ernst & Young international tax partner Heather Devine said it would surprise no one that the ‘rather elderly loophole’ had been closed.
PricewaterhouseCoopers corporate tax expert Derek Jenkins said: We’ve been amazed that this hasn’t been closed before. It was so obviously a loophole and was widely marketed by a number of banks. It clearly exploited the rules but was totally effective.’
But he added: ‘People will be disappointed. When you are winning you rather want it to carry on.’
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