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
478

(6)
A company is “share-linked” to the CFC if it has an interest in the
CFC only by virtue of it holding directly—
(a)
ordinary shares in the CFC, or
(b)
ordinary shares in another company which is share-linked to
the CFC (whether by virtue of paragraph (a) or this
5
paragraph),
and “share-linked company” means a company which is share-
linked to the CFC.
How are the apportionments to be made?
371QC
The basic rules
10
(1)
If conditions X to Z are met, the CFC’s chargeable profits and
creditable tax are to be apportioned among the relevant persons in
accordance with section 371QD.
(2)
If not, the percentage of the chargeable profits and the percentage of
the creditable tax to be apportioned to each relevant person is to be
15
determined on a just and reasonable basis.
(3)
Condition X is that the relevant persons all have their relevant
interests by virtue only of their holding, directly or indirectly,
ordinary shares in the CFC.
(4)
Condition Y is that each relevant person meets the requirement that
20
the person is either—
(a)
UK resident at all times during the accounting period, or
(b)
non-UK resident at all times during the accounting period.
(5)
Condition Z is that no company which has an intermediate interest
in the CFC at any time in the accounting period has that interest
25
otherwise than by virtue of holding, directly or indirectly, ordinary
shares in the CFC.
(6)
A company (“C”) has an “intermediate interest” in the CFC if—
(a)
C has an interest in the CFC, and
(b)
one or more of the relevant persons have relevant interests in
30
the CFC by virtue of having an interest in C.
371QD
Apportionments to be made in proportion to shareholding
(1)
If conditions X to Z in section 371QC are met, apply subsections (2)
and (3) to each relevant person.
(2)
Determine the percentage (“P%”) of the issued ordinary shares in the
35
CFC represented by the relevant person’s relevant interest.
(3)
P% of the CFC’s chargeable profits and P% of the CFC’s creditable
tax is then apportioned to the relevant person.
(4)
This section is supplemented by sections 371QE and 371QF.
371QE
Indirect shareholdings
40
(1)
This section applies to the relevant interest of a relevant person (“R”)
so far as R has that interest by virtue of holding, indirectly, ordinary
shares in the CFC (“the relevant shares”).

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
479

(2)
The percentage of the issued ordinary shares in the CFC represented
by R’s relevant interest (so far as this section applies to it) is given by
the following formula—

where—
P is the product of the appropriate fractions of R and each of the
5
share-linked companies through which R indirectly holds the
relevant shares, other than the share-linked company which
directly holds the relevant shares, and
S is the percentage of issued ordinary shares in the CFC which
the relevant shares represent.
10
(3)
“The appropriate fraction”, in relation to any person who directly
holds ordinary shares in a share-linked company, means that
fraction of the issued ordinary shares in the share-linked company
which the holding represents.
(4)
If R has different indirect holdings of shares in the CFC (as in the case
15
where different shares are held through different share-linked
companies)—
(a)
apply subsection (2) separately in relation to each holding
(reading references to the relevant shares accordingly), and
(b)
then add the separate results together to give the total
20
percentage of the issued ordinary shares in the CFC
represented by R’s relevant interest (so far as this section
applies to it).
371QF
Variable shareholdings
(1)
This section applies if the percentage of the issued ordinary shares in
25
the CFC represented by a relevant person’s relevant interest varies
during the accounting period.
(2)
That percentage is taken to be the percentage equal to the sum of the
relevant percentages for each holding period.
(3)
“Holding period” means a part of the accounting period during
30
which the percentage of the issued ordinary shares in the CFC
represented by the relevant person’s relevant interest remains the
same.
(4)
“Relevant percentage”, in relation to a holding period, means the
percentage given by the following formula—
35

where—
P is the percentage of the issued ordinary shares in the CFC
represented by the relevant person’s relevant interest during
the holding period,
H is the number of days in the holding period, and
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A is the number of days in the accounting period.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
480

Chapter 18
Control etc
371RA
Overview of Chapter
(1)
Sections 371RB and 371RE set out how to determine for the purposes
of this Part if a company is “controlled” by another person or
5
persons.
(2)
Sections 371RC and 371RG set out circumstances in which a non-UK
resident company which would not otherwise be a CFC is to be taken
to be a CFC for the purposes of this Part.
371RB
Legal and economic control
10
(1)
A person (“P”) “controls” a company (“C”) if—
(a)
by means of the holding of shares or the possession of voting
power in or in relation to C or any other company, or
(b)
by virtue of any powers conferred by the articles of
association or other document regulating C or any other
15
company,

P has the power to secure that the affairs of C are conducted in
accordance with P’s wishes.
(2)
A person (“P”) “controls” a company (“C”) if it is reasonable to
suppose that P would—
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(a)
if the whole of C’s share capital were disposed of, receive
(directly or indirectly and whether at the time of the disposal
or later) over 50% of the proceeds of the disposal,
(b)
if the whole of C’s income were distributed, receive (directly
or indirectly and whether at the time of the distribution or
25
later) over 50% of the distributed amount, or
(c)
in the event of the winding-up of C or in any other
circumstances, receive (directly or indirectly and whether at
the time of the winding-up or other circumstances or later)
over 50% of C’s assets which would then be available for
30
distribution.
(3)
For the purposes of subsection (2) any rights which P has as a
relevant bank are to be ignored.
(4)
In subsection (2)—
(a)
in paragraph (a) the reference to C’s share capital is to C’s
35
share capital excluding any share capital held by relevant
banks,
(b)
in determining for the purposes of paragraph (b) the
percentage of the distributed amount which it is reasonable
to suppose P would receive, ignore any rights of a relevant
40
bank which would entitle the bank directly to receive a
percentage of the distributed amount at the time of the
distribution, and
(c)
in determining for the purposes of paragraph (c) the
percentage of C’s assets which it is reasonable to suppose P
45
would receive, ignore any rights of a relevant bank which

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
481

would entitle the bank directly to receive a percentage of C’s
assets at the time of the winding-up or other circumstances.
(5)
“Relevant bank” means a person (“RB”) who—
(a)
carries on banking business which is regulated in the
territory in which RB is resident, and
5
(b)
is acting, in the ordinary course of that business, in relation to
money lent to C by RB in the ordinary course of that business.
(6)
In subsections (2) and (4) references to P receiving any proceeds,
amount or assets include references to the proceeds, amount or
assets being applied (directly or indirectly) for P’s benefit.
10
(7)
If two or more persons, taken together, meet the requirement of
subsection (1) or (2) for controlling a company, those persons are
taken to control the company.
371RC
Legal and economic control: the 40% rule
(1)
This section applies to a non-UK resident company (“C”) if—
15
(a)
in accordance with section 371RB(7), two persons (“the
controllers”) control C, and
(b)
one of the controllers is UK resident and the other is non-UK
resident.
(2)
If conditions X and Y are met, C is to be taken to be a CFC (if C would
20
not otherwise be).
(3)
Condition X is that the UK resident controller has interests, rights
and powers representing at least 40% of the holdings, rights and
powers in respect of which the controllers fall to be taken as
controlling C.
25
(4)
Condition Y is that the non-UK resident controller has interests,
rights and powers representing—
(a)
at least 40%, but
(b)
no more than 55%,

of the holdings, rights and powers in respect of which the controllers
30
fall to be taken as controlling C.
371RD
Legal and economic control: supplementary provision
(1)
Subsection (2) applies for the purpose of—
(a)
determining, in accordance with section 371RB, if a person, or
two or more persons, control a company, or
35
(b)
determining if condition X or Y in section 371RC is met in
relation to two persons who control a company.
(2)
There is to be attributed to each person all the rights and powers
mentioned in subsection (3) (so far as they would not otherwise be
attributed to the person).
40
(3)
The rights and powers referred to in subsection (2) are—
(a)
rights and powers which the person (“P”) is entitled to
acquire at a future date or which P will, at a future date,
become entitled to acquire,

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
482

(b)
rights and powers of other persons so far as they fall within
subsection (4),
(c)
if P is UK resident, rights and powers of any UK resident
person who is connected with P, and
(d)
if P is UK resident, rights and powers which would, in
5
accordance with subsection (2), be attributed to a UK resident
person (“Q”) who is connected with P if Q were P (including
rights and powers which would be attributed to Q by virtue
of this paragraph).
(4)
Rights and powers fall within this subsection so far as they—
10
(a)
are required, or may be required, to be exercised in one or
more of the following ways—
(i)
on behalf of P,
(ii)
under the direction of P, or
(iii)
for the benefit of P, and
15
(b)
are not confined, in a case where a loan has been made by one
person to another, to rights and powers conferred in relation
to property of the borrower by the terms of any security
relating to the loan.
(5)
In subsections (3)(b) to (d) and (4) references to a person’s rights and
20
powers include references to any rights or powers which the
person—
(a)
is entitled to acquire at a future date, or
(b)
will, at a future date, become entitled to acquire.
(6)
In determining for the purposes of this section whether one person is
25
connected with another, section 1122(4) of CTA 2010 (as applied by
section 371VF(2)(b)) is to be ignored.
(7)
In this section and sections 371RB and 371RC references to—
(a)
rights and powers of a person, or
(b)
rights and powers which a person is or will become entitled
30
to acquire,

include references to rights and powers which are exercisable by that
person, or (when acquired by that person) will be exercisable, only
jointly with one or more other persons.
371RE
Control determined by reference to accounting standards
35
(1)
A person (“P”) “controls” a company (“C”) at any time when P is C’s
parent undertaking.
(2)
But C is not to be taken to be a CFC by virtue of subsection (1) at the
time in question unless the 50% condition is met at that time.
(3)
To determine if the 50% condition is met at the time in question,
40
assume—
(a)
that C is a CFC at that time,
(b)
that that time is itself an accounting period of the CFC, and
(c)
that section 371BC (charging the CFC charge) applies in
relation to the assumed accounting period.
45
(4)
The 50% condition is met at the time in question if, as a result of steps
1 and 3 in section 371BC(1), at least 50% of the CFC’s chargeable

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
483

profits would be apportioned to P taken together with its UK
resident subsidiary undertakings (if any).
(5)
“Parent undertaking” and “subsidiary undertaking” are to be read in
accordance with Financial Reporting Standard 2 issued in July 1992
by the Accounting Standards Board, as from time to time modified,
5
amended or revised.
(6)
For the purposes of this section it does not matter if P does not
prepare, or is not required to prepare, consolidated financial
statements in accordance with Financial Reporting Standard 2 (but
see section 371RF(3)).
10
371RF
Power to amend section 371RE etc
(1)
The Treasury may by regulations amend section 371RE as they
consider appropriate to take account of—
(a)
any modification, amendment or revision of Financial
Reporting Standard 2, or
15
(b)
any relevant document.
(2)
“Relevant document” means—
(a)
a document which replaces Financial Reporting Standard 2,
or
(b)
a document which replaces, modifies, amends or revises a
20
document falling within paragraph (a) or a document which
is a relevant document by virtue of this paragraph.
(3)
The Treasury may by regulations make provision corresponding to
section 371RE—
(a)
which operates by reference to any other accounting
25
standard dealing with consolidated financial statements, and
(b)
which is to apply, instead of section 371RE, to determine if a
person “controls” a company where that person prepares, or
is required to prepare, consolidated financial statements in
accordance with that standard.
30
(4)
In subsection (3) references to section 371RE are to that section as
amended from time to time by regulations under subsection (1).
371RG
Anti-avoidance
(1)
This section applies to a non-UK resident company (“C”) which is not
a CFC if it is reasonable to suppose that, apart from an arrangement
35
falling within subsection (4), C would be a CFC.
(2)
C is to be taken to be a CFC.
(3)
The person or persons who it is reasonable to suppose would control
C apart from the arrangement—
(a)
are to be taken to control C, and
40
(b)
are to have attributed to them all interests, rights and powers
which it is reasonable to suppose would be attributed to them
apart from the arrangement.
(4)
An arrangement falls within this subsection if the main purpose, or
one of the main purposes, of the arrangement is to secure that C is
45
not a CFC.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
484

(5)
An arrangement which would otherwise fall within subsection (4)
does not fall within that subsection if—
(a)
the arrangement is solely for—
(i)
a transfer of shares in a non-UK resident company
(“X”) from a UK resident company to another non-UK
5
resident company (“Y”) so that X becomes controlled
by Y either alone or with other non-UK resident
companies, or
(ii)
the incorporation or formation of a non-UK resident
company (“X”) which, on its incorporation or
10
formation, is controlled by another non-UK resident
company (“Y”) either alone or with other non-UK
resident companies,
(b)
at the relevant time—
(i)
Y is not the 51% subsidiary of any other company,
15
and
(ii)
the no CFC charge condition is met, and
(c)
it is reasonable to suppose that—
(i)
after the relevant time, no economic benefit will
accrue to any UK resident company (directly or
20
indirectly) from X, or
(ii)
the total economic benefits which will accrue after the
relevant time to UK resident companies (directly or
indirectly) from X will be an insignificant proportion
of the total economic benefits which will accrue to
25
companies from X.
(6)
In subsection (5)(a) “controlled” is to be read in accordance with
section 371RB (with section 371RD).
(7)
To determine if the no CFC charge condition is met at the relevant
time for the purposes of subsection (5)(b)(ii), assume—
30
(a)
that Y is a CFC at the relevant time,
(b)
that the relevant time is itself an accounting period of the
CFC, and
(c)
that section 371BC (charging the CFC charge) applies in
relation to the assumed accounting period.
35
(8)
The no CFC charge condition is met at the relevant time if, in
accordance with the provision made at step 1 or 4 in section
371BC(1), the CFC charge would not be charged in relation to the
assumed accounting period.
(9)
“The relevant time” means the time at which, as the case may be—
40
(a)
the shares in X are transferred to Y, or
(b)
X is incorporated or formed.
(10)
“Economic benefit” does not include revenue received by a company
in exchange for goods or services provided by the company in the
ordinary course of its business.
45