Finance (No. 3) Bill (HC Bill 200)

(3) After that sub-paragraph insert—

“(1A) The conditions referred to in sub-paragraph (1)(c) are—

(a) that the asset was acquired, on or after the entry date, by—

(i) the company to which the pre-entry loss accrued
5(“company A”), or

(ii) a company which, at the time of the acquisition,
was a group company of company A,

from a person who at the time of the acquisition was not a
group company of company A, and

(b) 10that the asset has not, since its acquisition from that person,
been used or held for any purposes other than those of a
trade or business which—

(i) was being carried on by company A immediately
before the entry date, and

(ii) 15continued until the disposal to be carried on by
company A or a company which, when it carried
on the trade or business, was a group company of
company A.

(1B) For the purposes of sub-paragraph (1A), a company is a “group
20company of company A” at any time when it is a member of a
group of companies of which company A is also a member.

(1C) Where a company, having become a member of the relevant
group, subsequently becomes a member of another group (“the
new group”)—

(a) 25sub-paragraph (1) continues to have effect, in relation to
any loss which accrued to the company before it became a
member of the relevant group, by reference to the date on
which it became such a member, and

(b) accordingly, that sub-paragraph does not apply separately
30in relation to the loss by reason of it also having accrued to
the company before it became a member of the new
group.”

(4) Omit sub-paragraph (2).

(5) In sub-paragraph (3)—

(a) 35omit “, without prejudice to paragraph 9 below”,

(b) omit paragraph (b), and

(c) in paragraph (c), for “sub-paragraphs (1)(c) and (2)(c)” substitute
“sub-paragraph (1A)”.

(6) For sub-paragraph (4) substitute—

“(4) 40Sub-paragraphs (4A) and (4B) apply for determining for the
purposes of this paragraph whether an asset on the disposal of
which a chargeable gain accrues was an asset held by a company
immediately before the entry date (a “pre-entry asset”).

(4A) Except as provided by sub-paragraph (4B), an asset is not a pre-
45entry asset if—

(a) the company which held the asset at the entry date is not
the company which makes the disposal, and

(b) since the entry date that asset has been disposed of
otherwise than by a disposal to which section 171 applies.

(4B) Without prejudice to sub-paragraph (4C), where, on a disposal to
which section 171 does not apply—

(a) 5an asset would cease to be a pre-entry asset by virtue of
sub-paragraph (4A), but

(b) the company making the disposal retains an interest in or
over the asset in question,

that interest is a pre-entry asset.

(4C) 10For the purposes of this paragraph—

(a) an asset acquired or held by a company at any time and an
asset held at a later time by that company, or by any
company which is or has been a member of the same group
of companies as that company, is to be treated as the same
15asset if the value of the second asset is derived in whole or
in part from the first asset, and

(b) if—

(i) any asset is treated (whether by virtue of
paragraph (a) or otherwise) as the same as an asset
20held by a company at a later time, and

(ii) the first asset would have been a pre-entry asset in
relation to that company,

the second asset is also to be treated as a pre-entry asset in
relation to that company;

25and paragraph (a) applies, in particular, where the second asset is
a freehold and the first asset is a leasehold the lessee of which
acquires the reversion.”

(7) In sub-paragraph (5) omit “or (2)” (in both places).

(8) In sub-paragraph (6) omit “or (2)”.

7 (1) 30Paragraph 8 (change of a company’s nature) is amended as follows.

(2) In sub-paragraph (1)—

(a) after “trade” (in each place) insert “or business”,

(b) in paragraph (a) for “carried on by that company” substitute “which
was carried on by that company immediately before it became a
35member of that group”, and

(c) for “paragraph 7(1)(c) and (2)(c)” substitute “paragraph 7(1A)”.

(3) For sub-paragraph (2) substitute—

“(2) In sub-paragraph (1) “a major change in the nature or conduct of a
trade or business” includes—

(a) 40a major change in the type of property dealt in, or services
or facilities provided, in the trade or business,

(b) a major change in customers, markets or outlets of the
trade or business, or

(c) in the case of a company with investment business (within
45the meaning of section 1218 of CTA 2009), a major change
in the nature of the investments held;

and this paragraph applies even if the change is the result of a
gradual process which began outside the period of three years
mentioned in sub-paragraph (1)(a).”

8 Omit paragraph 9 (identification of “the relevant group” and application of
5Schedule to every connected group).

9 In paragraph 11 (continuity provisions), omit sub-paragraph (3)(b) (and the
“and” before it).

Consequential repeals

10 Omit the following provisions (which relate to the provisions repealed by
10paragraphs 1 to 9)—

(a) in FA 1994, sections 93(8) to (10) and 94;

(b) in FA 1998, section 138;

(c) in FA 2000, in Schedule 29, paragraph 7(2) to (5);

(d) in F(No.2)A 2005, section 65(2), (3) and (5).

15Commencement

11 (1) The amendments made by this Part of this Schedule have effect on and after
commencement in relation to the deduction of any pre-entry loss within
paragraph 1(2) of Schedule 7A to TCGA 1992 (as substituted by paragraph 3
of this Schedule) regardless of—

(a) 20whether the loss accrued before or on or after commencement, and

(b) whether the company which accrued the loss became a member of
the relevant group (within the meaning of that Schedule) before or
on or after commencement.

(2) In this paragraph “commencement” means the day on which this Act is
25passed.

Transitional provision

12 (1) Sub-paragraph (2) applies where, immediately before commencement,
Schedule 7A to TCGA 1992 had effect, in the case of a company which is or
has been a member of a group of companies (“the relevant group”) in
30relation to a loss of that company within paragraph 1(2)(b) of that Schedule
(pre-entry proportion of an allowable loss that has accrued to a company on
the disposal of a pre-entry asset).

(2) On and after commencement that loss is to be treated, for the purposes of
Schedule 7A to TCGA 1992, as if it were a pre-entry loss within the meaning
35of paragraph 1(2) of that Schedule (as substituted by paragraph 3 of this
Schedule) which accrued to that company immediately before it became a
member of the relevant group.

(3) In this paragraph “commencement” means the day on which this Act is
passed.

Section 47

SCHEDULE 12 Controlled foreign companies

Part 1 Exemptions for companies with limited UK connection

1 (1) 5Section 748 of ICTA (cases where apportionment of chargeable profits and
creditable tax under section 747(3) does not apply) is amended as follows.

(2) In subsection (1), in paragraph (b) for “that Schedule” substitute “Schedule
25”.

(3) After that paragraph insert—

“(ba) 10the company is exempt for that period by virtue of Part 2A of
that Schedule (exemption for trading companies with limited
UK connection); or

(bb) the company is exempt for that period by virtue of Part 2B of
that Schedule (exemption for companies exploiting
15intellectual property with limited UK connection); or”.

2 After section 751AA of that Act insert—

“751AB Reduction in chargeable profits: failure to qualify for exemptions

(1) This section applies if—

(a) an apportionment under section 747(3) would fall to be made
20as regards an accounting period (“the relevant accounting
period”) of a controlled foreign company,

(b) but for a relevant failure, section 748(1)(ba) or (bb) would
have prevented such an apportionment, and

(c) a company resident in the United Kingdom (“the UK resident
25company”) has a relevant interest in the controlled foreign
company in that period.

(2) “Relevant failure” means—

(a) in the case of section 748(1)(ba), one or both of the
following—

(i) 30a failure to satisfy the requirement of paragraph 12E
of Schedule 25 (requirement as to company’s UK
connection) in circumstances where the requirement
would be satisfied if the reference in sub-paragraph
(3)(a) of that paragraph to 10% were a reference to
3550%, and

(ii) a failure to satisfy the requirement of paragraph 12F
of that Schedule (finance income and relevant IP
income) in circumstances where the relevant IP
income of the controlled foreign company for the
40accounting period does not exceed 5% of the
company’s gross income for that period, and

(b) in the case of section 748(1)(bb), a failure to satisfy the
requirement of paragraph 12M of that Schedule (finance
income).

(3) The UK resident company may make an application to the
Commissioners for Her Majesty’s Revenue and Customs for the
chargeable profits of the controlled foreign company for the relevant
accounting period (“the chargeable profits”) to be reduced to an
5amount specified in the application (“the specified amount”).

The specified amount may be nil.

(4) If the Commissioners grant the application—

(a) the chargeable profits are treated as reduced to the specified
amount, and

(b) 10the controlled foreign company’s creditable tax (if any) for
that period is treated as reduced by so much of that tax as, on
a just and reasonable basis, relates to the reduction in the
chargeable profits,

for the purpose of applying section 747(3) to (5) for determining the
15sum (if any) chargeable on the UK resident company under section
747(4)(a) (but for no other purpose).

(5) The Commissioners may grant the application only if—

(a) they are satisfied that the specified amount is not less than the
relevant amount, and

(b) 20they have not previously granted an application made by the
UK resident company in respect of the relevant accounting
period under section 751A or 751AC.

(6) “The relevant amount” means—

(a) if the relevant failure is within subsection (2)(a), the sum of—

(i) 25the excess finance and IP income (if any) for the
relevant accounting period, and

(ii) in a case where there is a failure specified in
subsection (2)(a)(i), so much (if any) of the net
chargeable profits for that period as are not excluded
30by subsection (8), and

(b) if the relevant failure is within subsection (2)(b)—

(i) the amount (if any) by which the controlled foreign
company’s finance income for the relevant
accounting period exceeds 5% of its gross income for
35that period, or

(ii) if that amount is a negligible amount, nil.

(7) “The excess finance and IP income” for the relevant accounting
period means—

(a) the amount (if any) by which the total of the controlled
40foreign company’s finance income and relevant IP income for
that period exceeds 5% of its gross income for that period, or

(b) if that amount is a negligible amount, nil.

(8) Net chargeable profits are excluded by this subsection if, and to the
extent that, they can reasonably be regarded—

(a) 45as representing the net economic value which—

(i) arises to the appropriate body of persons (taken as a
whole), and

(ii) is created directly by qualifying work, or

(b) as not being wholly or partly attributable, directly or
indirectly, to transactions with persons within the charge to
United Kingdom tax.

(9) In subsection (8)(a) “qualifying work” means work which—

(a) 5is done in the territory in which the controlled foreign
company is resident, and

(b) is done in that territory by individuals working for the
controlled foreign company there.

(10) A transaction with a company which is within the charge to United
10Kingdom tax only because it carries on a trade in the United
Kingdom through a permanent establishment there is within
subsection (8)(b) only if the transaction is attributable to activities
carried on through that establishment.

(11) For the purposes of subsections (8) and (9)—

(a) 15section 751A(5), (6) and (9) applies as it applies for the
purposes of the equivalent provisions of section 751A, and

(b) paragraph 5(2) to (5) of Schedule 25 (residence of controlled
foreign company) applies as it applies in relation to Part 2 of
that Schedule.

(12) 20In this section—

• “finance income” has the meaning given by paragraph 12F(3) of
  Schedule 25 (with references to C read as references to the
  controlled foreign company);

• “relevant IP income” has the meaning given by paragraph
  2512F(4) of that Schedule;

• “net chargeable profits” means chargeable profits excluding so
  much of those profits as is directly attributable to the finance
  income or relevant IP income of the controlled foreign
  company;

• 30“UK-connected gross income” has the same meaning as in
  paragraph 12E of Schedule 25;

• “United Kingdom tax” means corporation tax or income tax;

and paragraph 12G of that Schedule (gross income) applies for the
purposes of this section as it applies for the purposes of Part 2A of
35that Schedule (with references to C read as references to the
controlled foreign company).”

3 In Schedule 25 to that Act (cases where section 747(3) does not apply), after
Part 2 insert—

“ Part 2A 40trading companies with limited UK connection

12B Introductory

(1) For the purposes of section 748(1)(ba), a controlled foreign
company (“C”) is exempt for an accounting period if the
requirements of this Part of this Schedule are satisfied.

(2) 45The requirements are those imposed as to C’s—

(a) business establishment (see paragraph 12C),

(b) business activities (see paragraph 12D),

(c) UK connection (see paragraph 12E), and

(d) finance income and relevant IP income (see paragraph
512F).

12C Business establishment

(1) The requirement of this paragraph is that throughout the
accounting period C has a business establishment in the territory
in which it is resident.

(2) 10For the purposes of sub-paragraph (1)—

(a) paragraph 5(2) to (5) (special rules about residence of the
company) applies as it applies for the purposes of Part 2 of
this Schedule, and

(b) paragraph 7 (meaning of “business establishment”) applies
15as it applies for the purposes of paragraph 6(1)(a).

12D Business activities

(1) The requirement of this paragraph is that—

(a) C’s business does not, at any time during the accounting
period, include to a substantial extent non-exempt
20activities, or

(b) if C is wholly engaged in business falling within paragraph
11(1)(c) (banking etc), C’s business does not, at any time
during the accounting period, include to a substantial
extent non-exempt activities which do not constitute
25investment business.

(2) For this purpose—

• “non-exempt activities” means—

  (a)

  the holding or managing of shares or securities,

  (b)

  the holding of intellectual property,

  (c)

  30dealing in securities, other than in the capacity of a
  broker,

  (d)

  the leasing of any description of property or rights,

  (e)

  the investment in any manner of funds which would
  otherwise be available, directly or indirectly, for
  35investment by or on behalf of any person (whether
  resident in the United Kingdom or not) who has, or is
  connected or associated with a person who has,
  control, either alone or together with other persons, of
  C, and

  (f)

  40if C is not a member of an insurance group
  throughout the accounting period, the effecting or
  carrying out of contracts of insurance between C and
  persons related to C;

• “investment business” means activities within paragraphs (a)
  45to (d) of paragraph 9(1).

(3) For the purposes of sub-paragraph (2)(f), a person is “related” to C
if—

(a) the person is connected or associated with C,

(b) the person has a 25 per cent assessable interest in C in the
case of the accounting period in question (within the
meaning of paragraph 6(4C)), or

(c) 5if C is a controlled foreign company in that accounting
period by virtue of subsection (1A) of section 747, the
person is connected or associated with either or both of the
two persons mentioned in that subsection.

(4) In sub-paragraph (2)—

• 10“broker” includes any person offering to sell securities to, or
  purchase securities from, members of the public generally;

• “contract of insurance” has the meaning given by Article 3(1)
  of the Financial Services and Markets Act 2000 (Regulated
  Activities) Order 2001;

• 15“insurance group” has the meaning given by paragraph
  11A(4);

• “intellectual property” is to be construed in accordance with
  paragraph 9(1A);

• “member of an insurance group” has the meaning given by
  20paragraph 11A(6).

12E UK connection

(1) The requirement of this paragraph is that C does not have a
significant connection with the United Kingdom during the
accounting period.

(2) 25C has a significant connection with the United Kingdom during
the accounting period if Condition A or B is met.

(3) Condition A is that—

(a) the UK-connected gross income of C’s business for that
period exceeds 10% of the gross income of that business for
30that period, and

(b) sub-paragraph (4) does not apply.

(4) This sub-paragraph applies if—

(a) at all times in the accounting period there are sufficient
individuals working for C in the territory in which it is
35resident, or in any other territory outside of the United
Kingdom, who have the competence and authority to
undertake all, or substantially all, of C’s business,

(b) C’s relevant profits for the accounting period do not
exceed 10% of C’s relevant operating expenses for that
40period, and

(c) the UK-connected gross income of C’s business for that
period does not exceed 50% of the gross income of that
business for that period.

(5) Condition B is that—

(a) 45the UK-connected related-party business expenditure of
C’s business for that period exceeds 50% of the total
related-party business expenditure of C’s business for that
period, and

(b) during the accounting period C has been involved in a
scheme where the main purpose, or one of the main
purposes, of any party to the scheme in entering into the
scheme is to achieve a reduction in corporation tax or any
5tax chargeable as if it were corporation tax.

(6) For the purposes of sub-paragraph (4)(a), individuals are not to be
regarded as working for C in any territory unless—

(a) they are employed by C in the territory, or

(b) they are otherwise directed by C to perform duties on its
10behalf in the territory.

(7) In this paragraph—

• “related-party business expenditure” means any
  expenditure, other than capital expenditure, which gives
  rise, directly or indirectly, to income of a person related to
  15C;

• “relevant profits”, for an accounting period, means the total
  profits of C for that period calculated in accordance with
  generally accepted accounting practice (disregarding any
  capital gains or losses), but before any deduction for
  20interest or tax;

• “relevant operating expenses” of C means operating
  expenses of C other than—

  (a)

  the cost of goods sold, and

  (b)

  related-party business expenditure;

• 25“scheme” means any scheme, arrangements or
  understanding of any kind whatever, whether or not
  legally enforceable, involving one or more transactions;

• “UK-connected gross income” means the gross income
  derived, directly or indirectly, from persons who are
  30within the charge to United Kingdom tax for all or part of
  the accounting period;

• “UK-connected related-party business expenditure” means
  related-party business expenditure which gives rise,
  directly or indirectly, to income of a person within the
  35charge to United Kingdom tax in respect of that income;

• “United Kingdom tax” means income tax or corporation tax;

and paragraph 12D(3) (persons “related” to C) applies for the
purposes of this paragraph as it applies for the purposes of
paragraph 12D(2)(f).

(8) 40In the case of a company which is within the charge to United
Kingdom tax only because it carries on a trade in the United
Kingdom through a permanent establishment there, for the
purposes of sub-paragraph (7)—

(a) the gross income derived from that company is so much of
45the gross income as is attributable to that establishment,
and

(b) the income received by that company is such of its income
as is attributable to that establishment.

12F Finance income and relevant IP income

(1) The requirement of this paragraph is that not more than 5% of C’s
gross income for the accounting period falls within sub-paragraph
(2).

(2) 5Gross income falls within this sub-paragraph to the extent that it
is—

(a) finance income, or

(b) relevant IP income.

(3) “Finance income” means—

(a) 10any amount which in accordance with UK generally
accepted accounting practice falls to be recognised as
arising from a financial asset, and

(b) any return, in relation to an amount, which—

(i) is produced for C by an arrangement to which C is
15party, and

(ii) is economically equivalent to interest,

except to the extent that the return is taken into account in
determining an amount within paragraph (a).

(4) “Relevant IP income” means royalties and receipts of a similar
20nature arising from intellectual property.

(5) For the purposes of sub-paragraph (3)(b), the amount of a return
is the amount which by virtue of the return would, in calculating
C’s chargeable profits, be treated under section 486B of CTA 2009
(disguised interest to be regarded as profit from loan relationship)
25as a profit arising to C from a loan relationship.

(6) But, in calculating that profit for the purposes of sub-paragraph
(5), sections 486B(7) and 486C to 486E of CTA 2009 are to be
ignored.

(7) In this paragraph—

• 30“economically equivalent to interest” is to be construed in
  accordance with section 486B(2) and (3) of CTA 2009;

• “financial asset” means a financial asset as defined for the
  purposes of UK generally accepted accounting practice or
  international accounting standards;

• 35“intellectual property” is to be construed in accordance with
  paragraph 9(1A).

12G Gross income

(1) References in this Part of this Schedule to C’s gross income are to
be construed in accordance with this paragraph.

(2) 40C’s gross income for an accounting period does not include—

(a) any distribution that would not be included in C’s
chargeable profits by reason of it being exempt for the
purposes of Part 9A of CTA 2009 (see section 931A of that
Act), or