Finance (No. 4) Bill

Session 2010 - 12
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Other Bills before Parliament

Finance (No. 4) Bill

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
436

(a)
the company would be a chargeable company were section
371BC (charging the CFC charge) to apply in relation to the
accounting period, and
(b)
the percentage of the CFC’s chargeable profits which would
be apportioned to the company at step 3 in section 371BC(1)
5
would represent more than half of X%.
(6)
Two or more companies may together give a notice if—
(a)
the companies would all be chargeable companies were
section 371BC (charging the CFC charge) to apply in relation
to the accounting period, and
10
(b)
the percentage of the CFC’s chargeable profits which would
be apportioned to the companies, taken together, at step 3 in
section 371BC(1) would represent more than half of X%.
(7)
In subsections (5) and (6) “X%” means the total percentage of the
CFC’s chargeable profits which would be apportioned to chargeable
15
companies at step 3 in section 371BC(1) were section 371BC
(charging the CFC charge) to apply in relation to the accounting
period.
371CF
Does Chapter 7 apply?
(1)
Chapter 7 (captive insurance business) applies for a CFC’s
20
accounting period if (and only if)—
(a)
at any time during the accounting period, the main part of the
CFC’s business is insurance business, and
(b)
the CFC’s assumed total profits include amounts falling
within subsection (2).
25
(2)
An amount falls within this subsection if it derives (directly or
indirectly) from—
(a)
a contract of insurance which is entered into with—
(i)
a UK resident company connected with the CFC, or
(ii)
a non-UK resident company connected with the CFC
30
acting through a UK permanent establishment, or
(b)
a contract of insurance which—
(i)
is entered into with a UK resident person, and
(ii)
is linked (directly or indirectly) to the provision of
goods or services to the UK resident person
35
(excluding services provided as part of insurance
business).
371CG
Does Chapter 8 apply?
(1)
Chapter 8 (solo consolidation) applies for a CFC’s accounting period
if (and only if) condition A or B is met.
40
(2)
Condition A is that, at any time during the accounting period—
(a)
the CFC is a subsidiary undertaking which is the subject of a
solo consolidation waiver under section BIPRU 2.1 of the FSA
Handbook, and
(b)
the CFC’s parent undertaking in relation to that waiver is a
45
UK resident company.
(3)
Condition B is that, at any time during the accounting period—

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
437

(a)
the CFC is controlled (either alone or with other persons) by
a UK resident bank which holds shares in the CFC,
(b)
the UK resident bank must meet requirements of the FSA
Handbook in relation to its capital,
(c)
any fall in the value of the shares held in the CFC would be
5
(wholly or mainly) ignored for the purpose of determining if
the UK resident bank meets those requirements of the FSA
Handbook, and
(d)
the main purpose, or one of the main purposes, of the UK
resident bank in holding the shares in the CFC is to obtain a
10
tax advantage for itself or any company connected with it.
(4)
In this section—
“the FSA Handbook” means the Handbook of Rules and
Guidance made by the Financial Services Authority (as that
Handbook has effect from time to time), and
15
“UK resident bank” means a UK resident person carrying on
banking business.
(5)
The Treasury may by regulations amend this Chapter or Chapter 8
as they consider appropriate to take account of—
(a)
any changes to the FSA Handbook, or
20
(b)
any relevant document published by the Financial Services
Authority from time to time.
(6)
“Relevant document” means—
(a)
a document which replaces the FSA Handbook, or
(b)
a document which changes or replaces a document falling
25
within paragraph (a) or a document which is a relevant
document by virtue of this paragraph.
Chapter 4
The CFC charge gateway: profits attributable to UK activities
371DA
Introduction to Chapter
30
(1)
Take the steps set out in section 371DB(1) to determine the CFC’s
profits falling within this Chapter for the purposes of step 2 in
section 371BB(1) (the CFC charge gateway).
(2)
In this Chapter references to the CFC’s assumed total profits are to
those profits excluding its non-trading finance profits and property
35
business profits (if any).
(3)
For the purposes of this Chapter—
(a)
“the OECD Report” means the Report on the Attribution of
Profits to Permanent Establishments of the Organisation for
Economic Co-operation and Development (“OECD”) dated
40
22 July 2010,
(b)
terms used which are also used in the OECD Report have the
same meaning as they have in the OECD Report,
(c)
“the CFC group” means the CFC taken together with the
companies with which it is connected as those companies
45
may change from time to time,

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
438

(d)
“the provisional Chapter 4 profits” has the meaning given at
step 7 in section 371DB(1),
(e)
“the relevant assets and risks” has the meaning given at step
1 in section 371DB(1), subject to any exclusions at step 2 or 6,
(f)
“SPF” means a significant people function or a key
5
entrepreneurial risk-taking function,
(g)
an SPF is a “UK SPF” so far as the SPF is carried out in the
United Kingdom—
(i)
by the CFC, otherwise than through a UK permanent
establishment, or
10
(ii)
by a company connected with the CFC, and
(h)
an SPF is a “non-UK SPF” so far as it is not a UK SPF.
(4)
The Treasury may by regulations amend this Chapter as they
consider appropriate to take account of any relevant document
published by OECD from time to time.
15
(5)
“Relevant document” means—
(a)
a document which replaces, updates or supplements the
report mentioned in subsection (3)(a), or
(b)
a document which replaces, updates or supplements a
document falling within paragraph (a) or a document which
20
is a relevant document by virtue of this paragraph.
371DB
The steps
(1)
Here are the steps referred to in section 371DA(1).

The steps are to be taken in accordance with the principles set out in
the OECD Report (so far as relevant).
25

Step 1

Identify the assets which the CFC has or has had, and the risks which
the CFC bears or has borne, and from which amounts included in the
CFC’s assumed total profits have arisen.

The identified assets and risks are called “the relevant assets and
30
risks”.

Step 2

Exclude from the relevant assets and risks any asset or risk to which
subsection (2) applies (subject to subsections (3) and (4)).

Step 3
35

Identify the SPFs carried out by the CFC group which are relevant
to—
(a)
the economic ownership of the assets included in the relevant
assets and risks, or
(b)
the assumption and management of the risks included in the
40
relevant assets and risks.

For this purpose, assume that the CFC group is a single company.

Step 4

Determine the extent to which the SPFs identified at step 3 are UK
SPFs and the extent to which they are non-UK SPFs.
45

If none of the SPFs is a UK SPF to any extent, then no profits fall
within this Chapter and no further steps are to be taken.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
439


Step 5

Assume that the UK SPFs determined at step 4 are carried out by a
permanent establishment which the CFC has in the United Kingdom
and, accordingly, determine the extent to which the assets and risks
included in the relevant assets and risks would be attributed to the
5
permanent establishment.

For this purpose, assume that the non-UK SPFs determined at step 4
are all carried out by the CFC itself (if that is not otherwise the case).

Step 6

Exclude from the relevant assets and risks any asset or risk, or any
10
assets or risks taken together, to which section 371DC applies.

Step 7

Re-determine the CFC’s assumed total profits on the basis that the
CFC—
(a)
does not hold, or has not held, the assets included in the
15
relevant assets and risks, and
(b)
does not bear, or has not borne, the risks included in the
relevant assets and risks,

so far as they would be attributed to the permanent establishment
mentioned at step 5.
20

“The provisional Chapter 4 profits” are the CFC’s assumed total
profits so far as they are left out of the re-determined profits.

Step 8

Exclude from the provisional Chapter 4 profits any amounts which
are required to be excluded by section 371DD, 371DE or 371DF.
25

The remaining profits (if any) fall within this Chapter.
(2)
This subsection applies to an asset or risk if the CFC’s assumed total
profits are only negligibly higher than what they would be if the
CFC—
(a)
did not hold, or had not held, the asset to any extent at all, or
30
(b)
did not bear, or had not borne, the risk to any extent at all.
(3)
The total number of assets and risks which may be excluded at step
2 in subsection (1) is limited as follows.
(4)
As well as applying to each asset and risk separately, subsection (2)
must also apply to all the assets and risks included in the total
35
number taken together.
371DC
Exclusion: UK activities a minority of total activities
(1)
For the purposes of step 6 in section 371DB(1), this section applies to
an asset or risk included in the relevant assets and risks if amount A
is no more than 50% of amount B.
40
(2)
Amount A is the total of—
(a)
the gross amounts (that is, the amounts before deduction of
expenses or transfers to or from reserves) of the CFC’s
income which would not have become receivable during the
accounting period had the CFC—
45
(i)
not held the asset, or
(ii)
not borne the risk,

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
440


so far as it would be attributed to the permanent
establishment mentioned at step 5 in section 371DB(1), and
(b)
the additional expenses which the CFC would have incurred
during the accounting period had the CFC—
(i)
not held the asset, or
5
(ii)
not borne the risk,

so far as it would be so attributed.
(3)
Amount B is the total of—
(a)
the gross amounts (that is, the amounts before deduction of
expenses or transfers to or from reserves) of the CFC’s
10
income which would not have become receivable during the
accounting period had the CFC—
(i)
not held the asset to any extent at all, or
(ii)
not borne the risk to any extent at all, and
(b)
the additional expenses which the CFC would have incurred
15
during the accounting period had the CFC—
(i)
not held the asset to any extent at all, or
(ii)
not borne the risk to any extent at all.
(4)
Subsection (5) applies if it is not reasonably practicable to separate a
number of assets or risks included in the relevant assets and risks for
20
the purpose of determining amounts A and B in relation to each of
those assets or risks separately.
(5)
In subsections (1) to (3) references to an asset or risk are to be read as
references to those assets or risks taken together.
371DD
Exclusion: economic value
25
(1)
Subsection (2) applies if—
(a)
an asset or risk is included in the relevant assets and risks,
(b)
the SPFs which are relevant to the economic ownership of the
asset, or the assumption and management of the risk, are
wholly or partly UK SPFs as determined at step 4 in section
30
371DB(1), and
(c)
as a result of that determination, an amount is included in the
provisional Chapter 4 profits.
(2)
The amount is to be excluded from the provisional Chapter 4 profits
if—
35
(a)
the net economic value to the CFC group which results from
the holding of the asset, or the bearing of the risk, exceeds
what that value would have been had the asset been held, or
the risk been borne, solely by UK resident companies
connected with the CFC, and
40
(b)
the relevant non-tax value is a substantial proportion of the
excess value mentioned in paragraph (a).
(3)
“Net economic value” does not include any value which derives
(directly or indirectly) from the reduction or elimination of any
liability of any person to tax or duty imposed under the law of any
45
territory outside the United Kingdom.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
441

(4)
“The relevant non-tax value” is the excess value mentioned in
subsection (2)(a) so far as it does not derive (directly or indirectly)
from the reduction or elimination of any liability of any person to tax
or duty imposed under the law of the United Kingdom.
(5)
Subsection (6) applies if—
5
(a)
there are SPFs which are relevant to the economic ownership
of a number of assets, or the assumption and management of
a number of risks, included in the relevant assets and risks,
and
(b)
it is not reasonably practicable to separate those assets or
10
risks for the purpose of determining the extent to which the
SPFs are relevant to the economic ownership of each of those
assets, or the assumption and management of each of those
risks, separately.
(6)
In subsections (1) and (2) references to an asset or risk are to be read
15
as references to those assets or risks taken together.
371DE
Exclusion: independent companies’ arrangements
(1)
Subsection (2) applies if—
(a)
an asset or risk is included in the relevant assets and risks,
(b)
the SPFs which are relevant to the economic ownership of the
20
asset, or the assumption and management of the risk, are
wholly or partly UK SPFs as determined at step 4 in section
371DB(1),
(c)
as a result of that determination, an amount is included in the
provisional Chapter 4 profits, and
25
(d)
the UK SPFs are carried out by companies connected with the
CFC under arrangements made between the CFC and those
companies.
(2)
The amount is to be excluded from the provisional Chapter 4 profits
if it is reasonable to suppose that, were the SPFs which are UK SPFs
30
not to be carried out by companies connected with the CFC, the CFC
would enter into arrangements with companies not connected with
the CFC which—
(a)
would be structured in the same way as the arrangements
mentioned in subsection (1)(d), and
35
(b)
would, in relation to the CFC’s business, have the same
commercial effect as those arrangements.
(3)
Subsection (4) applies if—
(a)
there are SPFs which are relevant to the economic ownership
of a number of assets, or the assumption and management of
40
a number of risks, included in the relevant assets and risks,
and
(b)
it is not reasonably practicable to separate those assets or
risks for the purpose of determining the extent to which the
SPFs are relevant to the economic ownership of each of those
45
assets, or the assumption and management of each of those
risks, separately.
(4)
In subsection (1) references to an asset or risk are to be read as
references to those assets or risks taken together.