Finance (No. 4) Bill (HC Bill 325)

371JB The basic rule

(1) The exempt period exemption applies for a CFC’s accounting period
if—

(a) the accounting period ends during an exempt period of the
5CFC (see sections 371JC and 371JD),

(b) the subsequent period condition is met, and

(c) the chargeable company condition is met.

(2) The subsequent period condition is met if—

(a) the CFC does not cease to be a CFC before having at least one
10accounting period which begins after the end of the exempt
period, and

(b) section 371BC (charging the CFC charge) does not apply in
relation to the CFC’s first accounting period to begin after the
end of the exempt period (see section 371BA (2)).

(3) 15The chargeable company condition is met if, at all times during the
relevant period—

(a) the charging condition in section 371JC is met, and

(b) each company which would be a chargeable company for the
purposes of that condition is an original chargeable company
20or is connected with an original chargeable company.

(4) In subsection (3)—

• “original chargeable company” means a company which, for
  the purposes of the charging condition in section 371JC,
  would be a chargeable company at the beginning of the
  25exempt period, and

• “the relevant period” means the period which—

  (a)

  begins immediately after the beginning of the exempt
  period, and

  (b)

  ends at the end of the CFC’s first accounting period to
  30begin after the end of the exempt period.

(5) This section is subject to section 371JF (anti-avoidance).

371JC When does an exempt period begin?

(1) An exempt period of a CFC begins at any time (“the relevant time”)
during an accounting period of the CFC if—

(a) 35the initial condition is met,

(b) the charging condition is met at the relevant time, and

(c) at no time during the relevant preceding period (if there is
one) is the charging condition met.

(2) The initial condition is met if—

(a) 40immediately before the relevant time, the company (“C”)
which is the CFC is carrying on a business, or

(b) if the relevant time is the time at which C is incorporated or
formed, C is formed or incorporated by one or more persons
for the purpose of controlling one or more companies in
45circumstances where it is expected that an exempt period will
begin in relation to one or more of those companies when C
begins to control the company or companies.

(3) To determine if the charging condition is met at any time, assume—

(a) that the company which is the CFC is a CFC at the time in
question if that is not otherwise the case,

(b) that the time in question is itself an accounting period of the
5CFC, and

(c) that section 371BC (charging the CFC charge) applies in
relation to the assumed accounting period.

(4) The charging condition is met at the time in question if, as a result of
steps 1, 3 and 4 in section 371BC (1), there would be one or more
10chargeable companies in relation to the assumed accounting period.

(5) “The relevant preceding period” means the period of 12 months
ending immediately before the relevant time, excluding any part of
that period during which the company which is the CFC does not
exist.

371JD 15 How long is an exempt period?

(1) Subject to what follows, an exempt period of a CFC lasts 12 months.

(2) Subsection (3) applies if a notice is given to an officer of Revenue and
Customs requesting that the length of an exempt period of a CFC be
extended (or further extended).

(3) 20An officer of Revenue and Customs may extend (or further extend)
the length of the exempt period.

(4) A notice under subsection (2) must be given no later than the end of
the exempt period (as it stands at the time the notice is given).

(5) A notice under subsection (2) may be given only by a company
25which, at the time the notice is given, would be a chargeable
company for the purposes of the charging condition in section 371JC.

371JE Adjustment of profits passing through the CFC charge gateway

(1) This section applies for a CFC’s accounting period if—

(a) the accounting period begins, but does not end, during an
30exempt period of the CFC, and

(b) the subsequent period condition and the chargeable
company condition in section 371JB are both met.

(2) The CFC’s assumed total profits which would otherwise pass
through the CFC charge gateway are to be adjusted to ensure that no
35profits which arise in the exempt period, as determined on a just and
reasonable basis, pass through the CFC charge gateway.

(3) This section is subject to section 371JF (anti-avoidance).

371JF Anti-avoidance

(1) The exempt period exemption does not apply for a CFC’s accounting
40period (“the relevant accounting period”) if condition A or B is met.

(2) Condition A is that—

(a) an arrangement is entered into at any time,

(b) the main purpose, or one of the main purposes, of the
arrangement is to secure a tax advantage for any person,

(c) the arrangement is linked to the exempt period exemption
applying or being expected to apply (apart from this
section)—

(i) for the relevant accounting period, or

(ii) 5for that period and one or more other accounting
periods of the CFC, and

(d) the arrangement involves one or both of the following—

(i) the CFC holding assets which give rise to non-trading
finance profits or trading finance profits of the CFC,
10or

(ii) the CFC holding intellectual property which gives
rise to any income of the CFC.

(3) Condition B is that—

(a) an arrangement is entered into at any time,

(b) 15in consequence of the arrangement, the length of any
accounting period of the CFC is less than 12 months, and

(c) the main purpose, or one of the main purposes, of the
arrangement is to secure that the exempt period exemption
applies—

(i) 20for the relevant accounting period, or

(ii) for that period and one or more other accounting
periods of the CFC.

(4) In this section references to the exempt period exemption include
references to section 371JE.

371JG 25 Amendment of company tax returns

(1) This section applies in relation to a company’s company tax return
for a corporation tax accounting period if an exempt period of a CFC
falls (wholly or partly) in the corporation tax accounting period.

(2) Any amendment of the return which relates to the application (or
30non-application) of the exempt period exemption or section 371JE for
an accounting period of the CFC may be made by the company at
any time no later than 12 months after the relevant filing date.

(3) “The relevant filing date” means the date which is the filing date
under paragraph 14 of Schedule 18 to FA 1998 for the company’s
35company tax return for its corporation tax accounting period in
which ends the CFC’s first accounting period to begin after the end
of the exempt period.

(4) “Corporation tax accounting period” means an accounting period for
corporation tax purposes.

Chapter 11

40The excluded territories exemption

371KA Introduction to Chapter

This Chapter sets out an exemption called “the excluded territories
exemption” for the purposes of section 371BA (2)(b).

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
5territory for the accounting period,

(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
10accounting period (see sections 371KE and 371KF),

(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) 15the CFC’s category D income (if any) for the
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
20main purposes, of which is to obtain a tax advantage for any
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
25CFCs resident in a specified excluded territory or to other specified
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) 30modify one or both of those requirements, including by
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) 35If an amount is included in more than one of the categories of income
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
40resident for an accounting period is to be determined in accordance
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) 45But section 371TA (1)(b) is to be applied only if, at all times during the
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.

(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) 5The threshold amount for a CFC’s accounting period is—

(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
10in subsection (1)(b) is to be reduced proportionately.

(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
15gross amounts (that is, amounts before deduction of expenses or
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) 20is brought into account in determining the CFC’s accounting
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
25dividend or other distribution of a company) so far as it is exempt
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
30law of that territory the purpose of which is (wholly or mainly) to
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) 35under the law of that territory, the CFC, any person who has
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) 40is directly or indirectly in respect of the whole or part
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) 45This section applies if—

(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
5territory outside the CFC’s territory, and

(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
10included had the references in section 371KE (3) to (5) to the CFC’s
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
15notional interest which—

(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
20total profits for the accounting period.

(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
25any of the CFC’s equity or debt.

(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) 30which is included in the CFC’s relevant income, and

(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
35in a territory outside the CFC’s territory.

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
40period which fall within section 371VD (3)(a) (whether or not
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)).

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) 5is brought into account in determining the CFC’s accounting
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) 10income arises from any provision made or imposed by means
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
15income is more than what it would have been had the
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
20CFC.

(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
25territory is at a reduced rate by virtue of a ruling or other decision or
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) 30The IP condition is met unless—

(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) 35transferred (directly or indirectly) to the CFC by
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
40held at times during that period by persons related to
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
45what it would otherwise have been, and

(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—

(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) 5as a result of the transfers or other derivations of the UK
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
10this section references to the transfer or holding of intellectual
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)
15for the purposes of a permanent establishment which the
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
20period and the 6 years before the accounting period.

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).

371LB 25 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.

(3) 30This 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

(b) 35the 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

(b) 40the 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.

371LC Anti-avoidance

(1) The low profits exemption does not apply for a CFC’s accounting
period (“the relevant accounting period”) if condition A or B is met.

(2) Condition A is that—

(a) 5an arrangement is entered into at any time,

(b) in consequence of the arrangement, the low profits
exemption would (apart from this section) apply for the
relevant accounting period, and

(c) the main purpose, or one of the main purposes, of the
10arrangement is to secure that the low profits exemption
applies—

(i) for the relevant accounting period, or

(ii) for that period and one or more other accounting
periods of the CFC.

(3) 15Condition B is that, at any time during the relevant accounting
period, the CFC’s business is, wholly or mainly, the provision of UK
intermediary services.

(4) For the purposes of subsection (3) the CFC provides “UK
intermediary services” if—

(a) 20a UK resident individual (“the service provider”) personally
performs, or is under an obligation personally to perform,
services in the United Kingdom for a person (“the client”),
and

(b) the services are provided not under a contract directly
25between the service provider and the client but under an
arrangement involving the CFC.

(5) The low profits exemption does not apply for a CFC’s accounting
period by virtue of section 371LB (2) or (4) if condition C is met.

(6) Condition C is that, in determining the CFC’s assumed taxable total
30profits for the accounting period, 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).

Chapter 13

35The low profit margin exemption

371MA Introduction to Chapter

This Chapter sets out an exemption called “the low profit margin
exemption” for the purposes of section 371BA (2)(b).

371MB The basic rule

(1) 40The low profit margin exemption applies for a CFC’s accounting
period if the CFC’s accounting profits for the period are no more
than 10% of the CFC’s relevant operating expenditure.

(2) In this section references to the CFC’s accounting profits are to those
profits as determined before any deduction for interest.

(3) The CFC’s “relevant operating expenditure” is its operating
expenditure brought into account in determining its accounting
profits for the accounting period, excluding—

(a) the cost of goods purchased by the CFC, other than goods
5used by the CFC in the territory in which it is resident for the
accounting period, and

(b) any expenditure which gives rise, directly or indirectly, to
income of a person related to the CFC.

371MC Anti-avoidance

10The low profit margin exemption does not apply for a CFC’s
accounting period (“the relevant accounting period”) if—

(a) an arrangement is entered into at any time,

(b) in consequence of the arrangement, the low profit margin
exemption would (apart from this section) apply for the
15relevant accounting period, and

(c) the main purpose, or one of the main purposes, of the
arrangement is to secure that the low profit margin
exemption applies—

(i) for the relevant accounting period, or

(ii) 20for that period and one or more other accounting
periods of the CFC.

Chapter 14

The tax exemption

371NA Introduction to Chapter

This Chapter sets out an exemption called “the tax exemption” for
25the purposes of section 371BA (2)(b).

371NB The basic rule

(1) Take the following steps to determine if the tax exemption applies for
a CFC’s accounting period.

Step 1

30Applying section 371TB, determine the territory (“the CFC’s
territory”) in which the CFC is resident for the accounting period.

Step 2

Determine the amount of tax (“the local tax amount”) which is paid
in the CFC’s territory in respect of the CFC’s local chargeable profits
35arising in the accounting period (applying section 371NC so far as
relevant).

Step 3