New CFC rules go live in next week’s Finance Bill

NEW RULES governing Controlled Foreign Companies (CFC) will go into the new Finance Bill published one week from today, the chancellor confirmed in his Budget speech. Companies with accounting periods starting on or after January 2013 are affected.

Coming into force is a ‘gateway’ test identifying artificial diversion of UK profits.

Companies must demonstrate that they hold no assets or risks managed “to a significant extent” in the UK; that they can operate without any UK-managed assets or risks; and that they are not using certain tax avoidance arrangements. Companies are allowed to choose which exemption they rely on.

The new finance company partial exemption – applying a CFC charge on just one-quarter of profits from financing of overseas group companies, and full exemption for such profits in certain limited circumstances – sets an effective tax rate of 5.5% on overseas financing profits when corporation tax falls to 22%, as was also announced.

Deloitte believes this “will enhance the UK’s position as a holding company location”.

Ian Menzies-Conacher, chairman of the CIoT’s international taxes sub-committee, welcomed the commitments, but warned the Bill needed to include changes to last December’s draft legislation on an Excluded Territories Exemption – not mentioned in the Budget.

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