Finance (No. 4) Bill

Session 2010 - 12
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Finance (No. 4) Bill

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
466

371KB
The basic rule
(1)
The excluded territories exemption applies for a CFC’s accounting
period if—
(a)
the CFC is resident (see section 371KC) in an excluded
territory for the accounting period,
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(b)
the total of the following amounts is no more than the
threshold amount for the accounting period (see section
371KD)—
(i)
the CFC’s category A income (if any) for the
accounting period (see sections 371KE and 371KF),
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(ii)
the CFC’s category B income (if any) for the
accounting period (see section 371KG),
(iii)
the CFC’s category C income (if any) for the
accounting period (see section 371KH), and
(iv)
the CFC’s category D income (if any) for the
15
accounting period (see section 371KI),
(c)
the IP condition is met (see section 371KJ), and
(d)
the CFC is not, at any time during the accounting period,
involved in an arrangement the main purpose, or one of the
main purposes, of which is to obtain a tax advantage for any
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person.
(2)
In this Chapter “excluded territory” means a territory specified as
such in regulations made by the HMRC Commissioners.
(3)
The HMRC Commissioners may also by regulations, in relation to
CFCs resident in a specified excluded territory or to other specified
25
cases, do one or more of the following—
(a)
provide that one or both of the requirements set out in
subsection (1)(b) and (c) does not have to be met in order for
the excluded territories exemption to apply;
(b)
modify one or both of those requirements, including by
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modifying any provision of this Chapter mentioned in
subsection (1)(b) or (c);
(c)
specify further requirements which must be met in order for
the excluded territories exemption to apply.
(4)
If an amount is included in more than one of the categories of income
35
mentioned in subsection (1)(b)(i) to (iv), the amount is to be counted
only once in determining if the threshold amount is exceeded.
371KC
How to determine the territory in which a CFC is resident
(1)
For the purposes of this Chapter the territory in which a CFC is
resident for an accounting period is to be determined in accordance
40
with this section; and in this Chapter “the CFC’s territory” means
that territory as so determined.
(2)
The CFC is taken to be resident in the territory determined in
accordance with section 371TA.
(3)
But section 371TA(1)(b) is to be applied only if, at all times during the
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accounting period, the CFC or persons with interests in the CFC are
liable under the law of the territory in question to tax on the CFC’s
income.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
467

(4)
If, as a result of subsection (3), no territory of residence can be
determined, the excluded territories exemption cannot apply for the
accounting period.
371KD
What is “the threshold amount”?
(1)
The threshold amount for a CFC’s accounting period is—
5
(a)
10% of the CFC’s accounting profits for the accounting
period, or
(b)
if more, £50,000.
(2)
If the accounting period is less than 12 months, the amount specified
in subsection (1)(b) is to be reduced proportionately.
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(3)
In this Chapter references to a CFC’s accounting profits for an
accounting period are to be read ignoring section 371VD(6) and (7).
371KE
Category A income: the basic rule
(1)
A CFC’s category A income for an accounting period consists of any
gross amounts (that is, amounts before deduction of expenses or
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transfers to or from reserves) of any relevant income to which
subsection (3), (4) or (5) applies.
This is subject to section 371KF.
(2)
“Relevant income” means any income of the CFC which—
(a)
is brought into account in determining the CFC’s accounting
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profits for the accounting period, or
(b)
is not so brought into account but arises in the accounting
period.
(3)
This subsection applies to any relevant income (apart from any
dividend or other distribution of a company) so far as it is exempt
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from tax in the CFC’s territory.
(4)
This subsection applies to any relevant income so far as the tax which
falls to be paid in respect of the relevant income in the CFC’s territory
is at a reduced rate by virtue of a provision having effect under the
law of that territory the purpose of which is (wholly or mainly) to
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encourage (directly or indirectly) investment in that territory.
(5)
This subsection applies to any relevant income if—
(a)
any tax falls to be paid in respect of the relevant income in the
CFC’s territory,
(b)
under the law of that territory, the CFC, any person who has
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an interest in the CFC or any person connected with the CFC
is entitled to any repayment of tax or any payment in respect
of a credit for tax, and
(c)
that repayment or payment—
(i)
is directly or indirectly in respect of the whole or part
40
of the tax mentioned in paragraph (a), but
(ii)
is not a form of relief in respect of losses incurred by
the CFC.
371KF
Category A income: permanent establishments in excluded territories
(1)
This section applies if—
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Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
468

(a)
a CFC’s category A income for an accounting period would
include (apart from this section) the gross amount of any
relevant income which arises from the activities of a
permanent establishment (“PE”) which the CFC has in a
territory outside the CFC’s territory, and
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(b)
the territory in which PE is established is an excluded
territory.
(2)
The gross amount of that relevant income is to be included in the
CFC’s category A income only so far as it would also have been
included had the references in section 371KE(3) to (5) to the CFC’s
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territory instead been references to the territory in which PE is
established.
371KG
Category B income
(1)
A CFC’s category B income for an accounting period consists of any
notional interest which—
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(a)
is deducted from any of the CFC’s relevant income for tax
purposes under the law of the CFC’s territory or any territory
in which the CFC has a permanent establishment, but
(b)
is not deducted in determining the CFC’s assumed taxable
total profits for the accounting period.
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(2)
But the CFC’s category B income is not to exceed its relevant non-
local income.
(3)
“Notional interest” means an amount representing a notional
interest expense or other financing charge calculated by reference to
any of the CFC’s equity or debt.
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(4)
“Relevant income” has the same meaning as in section 371KE.
(5)
“Relevant non-local income” means the gross amount (that is, the
amount before deduction of expenses or transfers to or from
reserves) of any non-trading income—
(a)
which is included in the CFC’s relevant income, and
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(b)
which is received (directly or indirectly) from—
(i)
a person resident outside the CFC’s territory, or
(ii)
a permanent establishment which a person resident
in the CFC’s territory (apart from the CFC itself) has
in a territory outside the CFC’s territory.
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371KH
Category C income
A CFC’s category C income for an accounting period is the total of
the following amounts—
(a)
amounts included in the CFC’s accounting profits for the
period which fall within section 371VD(3)(a) (whether or not
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those amounts would have been included in those profits
apart from section 371VD(3)(a)), and
(b)
amounts included in those profits by virtue only of section
371VD(3)(b)).

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
469

371KI
Category D income
(1)
A CFC’s category D income for an accounting period consists of the
gross amounts (that is, the amounts before deduction of expenses or
transfers to or from reserves) of any income which—
(a)
is brought into account in determining the CFC’s accounting
5
profits for the accounting period, and
(b)
is to be included in the CFC’s category D income in
accordance with subsection (3) or (4).
(2)
Subsection (3) applies if—
(a)
income arises from any provision made or imposed by means
10
of an arrangement as between the CFC and any company
connected with the CFC,
(b)
in the CFC’s territory, the income is reduced by an amount
(“the relevant amount”) for tax purposes on the basis that the
income is more than what it would have been had the
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company connected with the CFC not been connected with
the CFC, and
(c)
there is not in any territory a corresponding increase for tax
purposes in the income of a company connected with the
CFC.
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(3)
The relevant amount is to be included in the CFC’s category D
income.
(4)
Income is to be included in the CFC’s category D income so far as the
tax which falls to be paid in respect of the income in the CFC’s
territory is at a reduced rate by virtue of a ruling or other decision or
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an arrangement made in relation to the CFC by a governmental
authority in that territory.
371KJ
The IP condition
(1)
This section applies for the purposes of section 371KB(1)(c).
(2)
The IP condition is met unless—
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(a)
the CFC’s assumed total profits for the accounting period
include amounts arising from intellectual property held by
the CFC (“the exploited IP”),
(b)
all or parts of the exploited IP were—
(i)
transferred (directly or indirectly) to the CFC by
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persons related to the CFC at times during the
relevant period, or
(ii)
otherwise derived (directly or indirectly) at times
during that period out of or from intellectual property
held at times during that period by persons related to
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the CFC,
(c)
as a result of those transfers or other derivations, the value of
the intellectual property held by those persons related to the
CFC, taken together, has been significantly reduced from
what it would otherwise have been, and
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(d)
if only parts of the exploited IP were so transferred or
derived, the significance condition is met.
(3)
The significance condition is met if—

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
470

(a)
the parts of the exploited IP (“the UK derived IP”) which
were transferred or otherwise derived as mentioned in
subsection (2)(b) are, taken together, a significant part of the
exploited IP, or
(b)
as a result of the transfers or other derivations of the UK
5
derived IP, the CFC’s assumed total profits for the
accounting period are significantly higher than what they
would otherwise have been.
(4)
In relation to a non-UK resident person who is related to the CFC, in
this section references to the transfer or holding of intellectual
10
property by a person related to the CFC are limited to, as the case
may be—
(a)
the transfer of intellectual property which before the transfer
was held by the non-UK resident person (wholly or partly)
for the purposes of a permanent establishment which the
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person has in the United Kingdom, or
(b)
the holding of intellectual property by the non-UK resident
person (wholly or partly) for those purposes.
(5)
“The relevant period” means the period covering the accounting
period and the 6 years before the accounting period.
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Chapter 12
The low profits exemption
371LA
Introduction to Chapter
This Chapter sets out an exemption called “the low profits
exemption” for the purposes of section 371BA(2)(b).
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371LB
The basic rule
(1)
The low profits exemption applies for a CFC’s accounting period if
subsection (2), (3), (4) or (5) applies.
(2)
This subsection applies if the CFC’s accounting profits for the
accounting period are no more than £50,000.
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(3)
This subsection applies if the CFC’s assumed taxable total profits for
the accounting period are no more than £50,000.
(4)
This subsection applies if—
(a)
the CFC’s accounting profits for the accounting period are no
more than £500,000, and
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(b)
the amount of those profits representing non-trading income
is no more than £50,000.
(5)
This subsection applies if—
(a)
the CFC’s assumed taxable total profits for the accounting
period are no more than £500,000, and
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(b)
the amount of those profits representing non-trading income
is no more than £50,000.
(6)
If the accounting period is less than 12 months, the amounts specified
in subsections (2), (3), (4)(a) and (b) and (5)(a) and (b) are to be
reduced proportionately.
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