(b) any amount that would be taken into account in
computing chargeable gains if C were within the charge to
corporation tax.

(3) C’s gross income for an accounting period includes—

(a) 5any income which accrues during that period to the
trustees of a settlement in relation to which C is a settlor or
a beneficiary, and

(b) any income which accrues during that period to a
partnership of which C is a partner, apportioned between
10C and the other partners on a just and reasonable basis.

(4) Where there is more than one settlor or beneficiary in relation to
the settlement mentioned in sub-paragraph (3)(a), the income is to
be apportioned between C and the other settlors or beneficiaries
on a just and reasonable basis.

(5) 15In this paragraph—

• “distribution” has the same meaning as in the Corporation
  Tax Acts (see Part 23 of CTA 2010);

• “partnership” includes an entity established under the law of
  a country or territory outside the United Kingdom of a
  20similar character to a partnership; and “partner” is to be
  read accordingly.

Part 2B Companies exploiting intellectual property with limited UK
connection

12H 25Introductory

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

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

(a) 30business establishment (see paragraph 12I),

(b) intellectual property business (see paragraph 12J),

(c) other business activities (see paragraph 12K),

(d) UK connection (see paragraph 12L), and

(e) finance income (see paragraph 12M).

12I 35Business 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) For the purposes of sub-paragraph (1)—

(a) 40paragraph 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
as it applies for the purposes of paragraph 6(1)(a).

12J Intellectual property business

(1) The requirement of this paragraph is that C’s main business,
throughout the accounting period, consists of the exploitation of
intellectual property which does not have a relevant UK
5connection.

(2) For the purposes of sub-paragraph (1), if any part of C’s main
business consists of the exploitation of intellectual property which
has a relevant UK connection, that part is to be ignored if it is an
insignificant part of C’s main business.

(3) 10Intellectual property has a relevant UK connection if—

(a) at any time during the accounting period or the 6 years
immediately preceding that period, it has been held by a
person resident in the United Kingdom, or

(b) activities relating to the creation, maintenance or
15enhancement of the intellectual property (other than
activities of an incidental or insignificant nature) have been
carried on by a person who for some or all of the period—

(i) beginning when the activities were first carried on
by the person, and

(ii) 20ending at the end of the accounting period,

was related to C and within the charge to United Kingdom
tax.

12K Other business activities

(1) The requirement of this paragraph is that—

(a) 25C does not, at any time during the accounting period, carry
on any activities otherwise than in the course of its main
business, or

(b) if it carries on any such activities (“secondary activities”),
the secondary activities condition is met.

(2) 30The secondary activities condition is that either—

(a) the secondary activities do not, at any time during the
accounting period, constitute a substantial part of the
activities of C’s business taken as a whole, or

(b) section 748(1)(b) or (ba) would apply to prevent an
35apportionment under section 747(3) falling to be made as
regards that period, if C’s business consisted only of the
secondary activities carried on by it during the accounting
period.

12L UK connection

(1) 40The requirement of this paragraph is that C does not have a
significant connection with the United Kingdom during the
accounting period.

(2) C has a significant connection with the United Kingdom during
the accounting period if—

(a) 45all or a substantial proportion of C’s gross income for that
period consists of income from the exploitation of

intellectual property which derives from persons within
the charge to United Kingdom tax, or

(b) during that period C incurs expenditure (other than
expenditure of an incidental or insignificant nature) on—

(i) 5R&D sub-contractor payments, or

(ii) the creation, development or maintenance of
relevant intellectual property,

and that expenditure forms part of the income of a person
who for some or all of that period is related to C and within
10the charge to United Kingdom tax.

(3) In this paragraph—

• “R&D sub-contractor payment” means a payment made by C
  to another person in respect of research and development
  contracted out by C to that person;

• 15“relevant intellectual property” means intellectual property
  which does not have a relevant UK connection (see
  paragraph 12J(3)) and which C exploits in the course of its
  main business.

12M Finance income

20The requirement of this paragraph is that not more than 5% of C’s
gross income for the accounting period consists of finance income
(within the meaning of paragraph 12F(3)).

12N Interpretation of Part 2B

(1) For the purpose of this Part of this Schedule—

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

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

and paragraph 12G (meaning of “gross income”) applies as it
applies for the purposes of Part 2A of this Schedule.

(2) 30For the purposes of this Part of this Schedule a person is “related”
to C at a particular time if at that time—

(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 of C in which that time falls
35(within the meaning of paragraph 6(4C)), or

(c) if C is a controlled foreign company in the accounting
period in which that time falls 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
40subsection.

(3) In 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—

(a) for the purposes of paragraph 12J(3)(b), the activities
45carried on by the company are such of the activities as are
carried on through that establishment,

(b) for the purposes of paragraph 12L(2)(a), the income
derived from that company is such of the income so
derived as is attributable to that establishment, and

(c) for the purposes of paragraph 12L(2)(b), the income of that
5company is such of its income as is attributable to that
establishment.”

Part 2 Amendment of small chargeable profits exception

4 (1) Section 748 of ICTA (cases where apportionment of chargeable profits and
10creditable tax under section 747(3) does not apply) is amended as follows.

(2) In subsection (1), after paragraph (d) insert—

“(da) the relevant profits for the accounting period, after any
adjustment required by subsection (3C), do not exceed—

(i) £200,000, or

(ii) 15if the accounting period is less than 12 months, a
proportionately reduced amount; or”.

(3) After subsection (3) insert—

“(3A) The reference in subsection (1)(da) to the relevant profits for an
accounting period are to the sum of—

(a) 20the profits of the company for that period calculated in
accordance with generally accepted accounting practice
(disregarding any exempt distributions and any capital gains
or losses), before any adjustment required or authorised by
law in calculating chargeable profits,

(b) 25any amount which accrues during that period to the trustees
of a settlement in relation to which the company is a settlor or
a beneficiary, and

(c) the company’s share of any income which accrues during
that period to a partnership of which the company is a
30partner.

(3B) For the purposes of subsection (3A)—

(a) “exempt distribution” means a distribution (within the
meaning of Part 23 of CTA 2010) which would be excluded
from the company’s chargeable profits by reason of it being
35exempt for the purposes of Part 9A of CTA 2009 (company
distributions),

(b) where there is more than one settlor or beneficiary in relation
to the settlement mentioned in subsection (3A)(b), the income
is to be apportioned between the company and the other
40settlors or beneficiaries on a just and reasonable basis, and

(c) the company’s share of any income which accrues to a
partnership as mentioned in subsection (3A)(c) is to be
determined by apportioning that income between the
company and the other partners on a just and reasonable
45basis;

and in subsection (3A) and this subsection “partnership” includes an
entity established under the law of a country or territory outside the

United Kingdom of a similar character to a partnership; and
“partner” is to be read accordingly.

(3C) For the purposes of subsection (1)(da), Part 4 of TIOPA 2010 (transfer
pricing) applies in relation to the calculation of the relevant profits
5for the accounting period as it applies in relation to the calculation of
the chargeable profits for that period.

(3D) But where the difference made in the amount of the relevant profits
for the period as a result of the application of subsection (3C) would
(disregarding this subsection) not exceed £50,000, no adjustment
10under that subsection is to be made.”

(4) In subsection (6) for “section” substitute “sections 748ZA and”.

5 After that section insert—

“748ZA Exclusion of small profits exemptions

(1) Nothing in section 748(1)(da) prevents an apportionment falling to
15be made as regards an accounting period (“the relevant accounting
period”) of a controlled foreign company (“X”) if condition A, B or C
is met.

(2) Condition A is that at any time before the end of the relevant
accounting period a scheme is entered into and—

(a) 20in the absence of this subsection, in consequence of the
scheme, section 748(1)(da) would apply to prevent an
apportionment falling to be made as regards the relevant
accounting period of X, and

(b) the main purpose, or one of the main purposes, of any party
25to the scheme in entering into the scheme is to secure that
section 748(1)(da) prevents an apportionment falling to be
made as regards that period, or that period and one or more
other accounting periods of X.

(3) Condition B is that at any time before the end of the relevant
30accounting period a scheme is entered into and—

(a) in consequence of the scheme profits are shifted to X from
another company (“Y”),

(b) the main purpose or one of the main purposes of any party to
the scheme in entering into the scheme is to ensure that
35section 748(1)(da) prevents an apportionment falling to be
made as regards the chargeable profits of one or more
controlled foreign companies for one or more accounting
periods, and

(c) the relevant accounting period of X falls wholly or partly
40within that accounting period or those accounting periods.

(4) For the purposes of subsection (3), profits are shifted to X from Y if it
is reasonable to suppose that in the absence of the scheme, and any
similar scheme, the whole or a part of the income which is reflected
in X’s profits would have been reflected in Y’s profits.

(5) 45Condition C is that, in determining X’s chargeable profits for the
relevant accounting period—

(a) section 418(5) of CTA 2009 (loan relationships involving
connected debtor and creditor where debits exceed credits)
has effect so as to treat X, for the purposes of Part 5 of that
Act, as bringing into account for that period credits in respect
5of a loan relationship, or

(b) Part 21B of CTA 2010 (group mismatch schemes) has effect so
as to exclude an amount from being brought into account as
a debit or credit for the purposes of Part 5 of CTA 2009 (loan
relationships) or Part 7 of that Act (derivative contracts).

(6) 10For the purposes of this section—

• “apportionment” means an apportionment under section
  747(3);

• “scheme” means any scheme, arrangements or understanding
  of any kind whatever, whether or not legally enforceable,
  15involving one or more transactions.”

Part 3 Temporary exemption following reorganisation etc

6 (1) Section 748 of ICTA (cases where section 747(3) does not apply) is amended
as follows.

(2) 20After subsection (1)(e) insert “; or

(f) the accounting period ends during an exempt period in
relation to the company (see Part 3A of Schedule 25).”

(3) In subsection (3) for “(e)” substitute “(f)”.

7 After section 751AB of that Act (inserted by paragraph 2 of this Schedule)
25insert—

“751AC Reduction in chargeable profits following an exempt period

(1) This section applies if—

(a) an exempt period in relation to a controlled foreign company
ends in accordance with paragraph 15F(2) of Schedule 25
30(time exempt period ends if there is an early termination
event), other than by reason of an early termination event
within paragraph 15F(3)(b),

(b) an accounting period (“the relevant accounting period”) of
the company ends after that exempt period but before the
35time the exempt period would have ended had paragraph
15F(2) of that Schedule not applied,

(c) an apportionment under section 747(3) would fall to be made
as regards the relevant accounting period, and

(d) a company resident in the United Kingdom (“the UK resident
40company”) has a relevant interest in the controlled foreign
company in that period.

(2) 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 that
45accounting period (“the chargeable profits”) to be reduced to an

amount (“the specified amount”) specified in the application (which
may be nil).

(3) If the Commissioners grant the application—

(a) the chargeable profits are treated as reduced to the specified
5amount, and

(b) the 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,

10for the purpose of applying section 747(3) to (5) for determining the
sum (if any) chargeable on the UK resident company under section
747(4)(a) (but for no other purpose).

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

(a) they are satisfied that the specified amount is not less than the
15relevant amount, and

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

(5) “The relevant amount” means the amount (if any) equal to so much
20of the chargeable profits as it is just and reasonable to regard as
referable to—

(a) the relevant transaction which triggered the end of the
exempt period, or

(b) any later relevant transaction occurring before the time the
25exempt period would have ended had paragraph 15F(2) of
Schedule 25 not applied.

(6) “Relevant transaction” has the meaning given by paragraph 15E of
Schedule 25 (and it does not matter if the transaction occurs pursuant
to an agreement entered into by the controlled foreign company
30before the relevant time (within the meaning of paragraph 15G of
that Schedule)).”

8 In Schedule 25 to that Act (cases where section 747(3) does not apply), before
Part 4 of that Schedule insert—

“ Part 3A 35Exempt periods

15A Introductory

The provisions of this Part of this Schedule have effect for the
purposes of section 748(1)(f).

15B Beginning of exempt period

(1) 40An exempt period begins in relation to a company (“X”) at a time
(“the relevant time”) when—

(a) X is resident outside the United Kingdom,

(b) X is controlled by persons resident in the United Kingdom,

(c) there is at least one relevant UK corporate investor in X,
and

(d) the requirements of paragraph 15C or 15D are met.

(2) There is a “relevant UK corporate investor in X” at a particular
5time if, at that time, there is a company which—

(a) is resident in the United Kingdom, and

(b) would, on the assumptions set out in sub-paragraph (3), be
a company to which an apportionment of X’s chargeable
profits for the relevant accounting period would fall to be
10made in circumstances where section 747(5) would not
prevent tax being chargeable on the company under
section 747(4).

(3) The assumptions are—

(a) X has chargeable profits for the relevant accounting
15period,

(b) an apportionment of those profits falls to be made under
section 747(3) for that period, and

(c) no reduction of those profits arises under section 751A,
751AA or 751AB.

(4) 20“The relevant accounting period” means the accounting period of
X in which the time mentioned in sub-paragraph (2) falls.

(1) The requirements of this paragraph are that—

(a) no company was, at any time before the relevant time, a
relevant UK corporate investor in X,

(b) 25no asset owned by X, or part of the business carried on by
X, at the relevant time was previously owned, or carried
on, by a company which—

(i) was under the control of persons resident in the
United Kingdom at any time it owned the asset or
30carried on the part of the business, and

(ii) is or has been related to X,

(c) condition A, B, C or D is met, and

(d) no disqualifying relevant transaction occurs (see
paragraph 15E).

(2) 35Condition A is that, immediately before the relevant time, X—

(a) was in existence, but

(b) was not a member of the same group of companies as any
person who, at the relevant time, was a controlling UK
person.

(3) 40Condition B is that—

(a) at the relevant time X is controlled by a company which is
resident in the United Kingdom, and

(b) immediately before that time, X was controlled by that
same company but that company was not then resident in
45the United Kingdom.

(4) Condition C is that—

(a) at the relevant time—

(i) X is controlled by a company which is resident in
the United Kingdom (“the intermediate parent”),
and

(ii) the intermediate parent is controlled by a company
5which is not resident in the United Kingdom (“the
parent”), and

(b) immediately before that time X was controlled by the
parent but not the intermediate parent.

(5) Condition D is that X—

(a) 10is a controlled foreign company at the time it is formed,
and

(b) is formed by one or more persons for the purpose of
controlling one or more companies in circumstances where
it is expected that an exempt period will begin in relation
15to one or more of those companies at the time when X
begins to control the company or companies.

(6) In this paragraph “controlling UK person” means a person
resident in the United Kingdom who alone, or together with other
such persons, controls X.

(1) 20The requirements of this paragraph are that—

(a) the relevant time falls after 23 March 2011,

(b) X has an accounting period during which 23 March 2011
falls,

(c) no company was, at any time during that accounting
25period, a relevant UK corporate investor in X,

(d) no company was, immediately before the relevant time, a
relevant UK corporate investor in X,

(e) at the relevant time X is controlled by a company which—

(i) is resident in the United Kingdom, and

(ii) 30is not under the control of another body corporate,
or two or more other bodies corporate taken
together, and

(f) no disqualifying relevant transaction occurs (see
paragraph 15E).

(2) 35In determining for the purposes of sub-paragraph (1)(e)(ii)
whether a company is under the control of two or more bodies
corporate taken together, a body corporate which holds less than
10% of the issued ordinary shares of that company is to be
disregarded.

(3) 40For the purposes of sub-paragraph (2), a body corporate is treated
as holding any shares held by persons who are connected or
associated with the body corporate.

15E Disqualifying relevant transactions

(1) This paragraph applies for the purposes of paragraph 15C and
4515D.

(2) A disqualifying relevant transaction occurs if—

(a) a relevant transaction occurs at the relevant time (whether
or not the transaction occurs pursuant to an agreement
entered into by X before that time), or

(b) a relevant transaction occurs on or after 9 December 2010
5but before the relevant time and that transaction forms
part of an avoidance scheme.

(3) “Relevant transaction” means—

(a) the making by X of a loan or advance of an amount (other
than a negligible amount) to a person who, at the time it is
10made, is related to X and subject to United Kingdom tax,

(b) an increase (other than an increase of a negligible amount)
in the amount of an existing loan or advance made by X to
a person who, at the time of the increase, is related to X and
subject to United Kingdom tax,

(c) 15a change in the terms or conditions of an existing loan or
advance made by X where—

(i) the loan or advance is to a person who, at the time
the change is made, is related to X and subject to
United Kingdom tax, and

(ii) 20the change has an effect (other than a negligible
effect) on the amount of interest payable, or

(d) a transaction to which sub-paragraph (4) applies.

(4) This sub-paragraph applies to a transaction if—

(a) it is referable to an activity carried on by X as part, or the
25whole, of any non-exempt activities carried on by X,

(b) the results of the transaction are reflected in the profits
arising in an accounting period of X and are not negligible
in value, and

(c) the results of the transaction alone, or together with the
30results of one or more other transactions, achieves a
reduction in United Kingdom tax.

(5) A transaction achieves, or two or more transactions together
achieve, a reduction in United Kingdom tax if, had the transaction
or transactions not been effected, any person—

(a) 35would have been liable for any such tax or for a greater
amount of any such tax, or

(b) would not have been entitled to a relief from or repayment
of any such tax or would have been entitled to a smaller
relief from or repayment of any such tax.

(6) 40In this paragraph—

• “avoidance scheme” means a scheme the main purpose, or
  one of the main purposes, of any party to which in entering
  into the scheme is to secure that section 748(1)(f) prevents
  an apportionment falling to be made under section 747(3)
  45as regards an accounting period, or accounting periods, of
  X;

• “non-exempt activities” has the meaning given by paragraph
  12D(2);

Finance (No. 3) BillPage 200

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

• “United Kingdom tax” means corporation tax (or any tax
  5chargeable as if it were corporation tax) or income tax.

15F Ending of exempt period

(1) An exempt period ends on the expiry of the period of 24 months
which begins immediately after the first accounting period of X to
end after the relevant time, unless sub-paragraph (2) applies.