Finance Bill

Session 2012 - 13
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Finance Bill

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
429

371BE
Companies which are managers of offshore funds etc
(1)
A company (“C”) is not a chargeable company for the purposes of
step 4 in section 371BC(1) if—
(a)
the CFC is an offshore fund (as defined in section 355),
(b)
the genuine diversity of ownership condition set out in
5
regulation 75 of the Offshore Funds (Tax) Regulations 2009
(S.I. 2009/3001) is met in relation to the fund,
(c)
C meets the fund management condition, and
(d)
apart from this section, a sum of no more than £500,000
would be charged on C as a chargeable company at step 5 in
10
section 371BC(1).
(2)
In applying regulation 75 of the 2009 Regulations for the purposes of
subsection (1)(b), the reference in paragraph (1) to the period of
account is to be read as a reference to the accounting period.
(3)
C meets the fund management condition if at all times during the
15
accounting period when C has relevant interests in the offshore
fund—
(a)
the assets of the offshore fund are managed by C or a person
connected with C,
(b)
C or the person connected with C receives out of those assets
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fees for managing those assets, and
(c)
C holds its relevant interests only or mainly for the purpose
of attracting participants (as defined in section 362) to the
fund who are not connected with C.
(4)
If the accounting period is less than 12 months, the amount specified
25
in subsection (1)(d) is to be reduced proportionately.
371BF
Companies which are participants in offshore funds
(1)
A company (“C”) is not a chargeable company for the purposes of
step 4 in section 371BC(1) if—
(a)
the CFC is an offshore fund (as defined in section 355),
30
(b)
at the relevant time and at all subsequent relevant times, C
reasonably believes that the requirement of section 371BD(1)
will not be met in relation to it, and
(c)
the meeting of that requirement in relation to C is in no way
attributable to any step—
35
(i)
which was taken by C or any person connected or
associated with C, and
(ii)
which, at the time it was taken, could reasonably have
been expected to cause that requirement to be met.
(2)
“The relevant time” means—
40
(a)
the beginning of the accounting period, or
(b)
if C has no relevant interests in the offshore fund at the
beginning of the accounting period, the time when C first has
a relevant interest during the accounting period.
(3)
“Subsequent relevant time” means any time during the accounting
45
period at which there is an increase or some other change in the
relevant interests in the offshore fund which C has.

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
430

371BG
Companies holding shares as trading assets etc
(1)
A company (“C”) is not a chargeable company for the purposes of
step 4 in section 371BC(1) if—
(a)
C has its relevant interests in the CFC by virtue only of its
holding, directly or indirectly, shares in the CFC,
5
(b)
any increase in the value of the shares held by C which occurs
during the accounting period is (or would be) income, or
brought into account in determining any income, of C for
corporation tax purposes, and
(c)
any dividend or other distribution received by C from the
10
CFC during the accounting period is (or would be) income, or
brought into account in determining any income, of C for
corporation tax purposes.
(2)
Subsection (3) applies if—
(a)
C has relevant interests in the CFC by virtue of section
15
371OB(3) or (4),
(b)
the CFC is an offshore fund (as defined in section 355) which
does not meet the qualifying investments test in section 493
of CTA 2009, and
(c)
in consequence of the offshore fund not meeting that test, the
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requirements of subsection (1)(b) and (c) are not met.
(3)
The requirements of subsection (1)(b) and (c) are to be taken to be
met.
371BH
Companies carrying on BLAGAB
(1)
Step 5 in section 371BC(1) is to be taken in relation to a chargeable
25
company (“CC”) on the basis set out in subsection (2) if—
(a)
CC carries on basic life assurance and general annuity
business during the relevant corporation tax accounting
period,
(b)
the assets which represent CC’s relevant interests in the CFC
30
are (to any extent) assets held by CC for the purposes of CC’s
long-term business, and
(c)
the I - E rules apply to CC for the relevant corporation tax
accounting period.
(2)
That basis is—
35
(a)
in paragraph (a), the reference to the appropriate rate is to be
read as a reference to—
(i)
the policyholders’ rate of tax under section 102 of FA
2012 applicable to the I - E profit of CC for the relevant
corporation tax accounting period, or
40
(ii)
if there is more than one such rate, the average rate
over the whole of the relevant corporation tax
accounting period,
(b)
paragraph (a) is to apply only in relation to the policyholders’
share of the BLAGAB component of the CFC’s chargeable
45
profits (“the apportioned profit”) apportioned to CC at step 3
in section 371BC(1), and
(c)
for the purposes of paragraph (b), the CFC’s creditable tax
apportioned to CC is to be reduced so as to be equal to the

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
431

proportion which the policyholders’ share of the BLAGAB
component of the apportioned profit bears to the whole of the
apportioned profit.
(3)
Take the following steps to determine the “BLAGAB component” of
the apportioned profit.
5

Step 1

Assume that the apportioned profit is income falling within section
74(1)(j) of FA 2012 paid to CC at the end of the CFC’s accounting
period.

Step 2
10

Calculate how much of that income would be referable, in
accordance with Chapter 4 of Part 2 of FA 2012, to CC’s basic life
assurance and general annuity business.

That amount is the “BLAGAB component” of the apportioned profit.
(4)
The “policyholders’ share” of the BLAGAB component of the
15
apportioned profit is equal to the policyholders’ share of the I - E
profit for the relevant corporation tax accounting period as
determined in accordance with the rules contained in Chapter 5 of
Part 2 of FA 2012.
Chapter 3
20
The CFC charge gateway: determining which (if any) of Chapters 4 to 8 applies
371CA
Does Chapter 4 apply?
(1)
Chapter 4 (profits attributable to UK activities) applies for a CFC’s
accounting period unless condition A, B, C or D is met.
(2)
Condition A is that, at no time during the accounting period, does
25
the CFC hold assets or bear risks under an arrangement to which
both subsections (3) and (4) apply.
(3)
This subsection applies to an arrangement if—
(a)
the main purpose, or one of the main purposes, of the
arrangement is to reduce or eliminate any liability of any
30
person to tax or duty imposed under the law of the United
Kingdom, and
(b)
in consequence of the arrangement, at any time the CFC
expects its business to be more profitable than it would
otherwise be (other than negligibly so).
35
(4)
This subsection applies to an arrangement if—
(a)
there is an expectation that, as a consequence of the
arrangement, one or more persons will have liabilities to tax
or duty imposed under the law of any territory reduced or
eliminated, and
40
(b)
it is reasonable to suppose that, but for that expectation, the
arrangement would not have been made.
(5)
Condition B is that, at no time during the accounting period, does the
CFC have any UK managed assets or bear any UK managed risks
(see subsection (9)).
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Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
432

(6)
Condition C is that, at all times during the accounting period, the
CFC has itself the capability to ensure that the CFC’s business would
be commercially effective were—
(a)
the UK managed assets of the CFC, and
(b)
the UK managed risks borne by the CFC,
5

to stop being UK managed.
(7)
In subsection (6) the reference to the capability of the CFC includes
(in particular) its capability to select persons not connected with it to
provide it with goods or services and to manage the transactions it
has with persons not connected with it.
10
(8)
In determining if the requirements of subsection (6) are met at any
time (“the relevant time”) during the accounting period, assume—
(a)
that the CFC would continue to carry on the same business as
it is actually carrying on at the relevant time, and
(b)
that no relevant UK activities (see subsection (10)) by which
15
any asset or risk was UK managed would be replaced—
(i)
by activities carried on by any person connected with
the CFC at any time, or
(ii)
in any other way which relies to any extent upon the
CFC receiving (directly or indirectly) resources or
20
other assistance from a person connected with it at
any time.
(9)
An asset or risk is “UK managed” if—
(a)
the acquisition, creation, development or exploitation of the
asset, or
25
(b)
the taking on, or bearing, of the risk,

is managed or controlled to any significant extent by way of relevant
UK activities.
(10)
“Relevant UK activities” means activities carried on in the United
Kingdom—
30
(a)
by the CFC, otherwise than through a UK permanent
establishment, or
(b)
by companies connected with the CFC under arrangements
which would not, it is reasonable to suppose, be entered into
by companies not connected with each other.
35
(11)
Condition D is that the CFC’s assumed total profits consist only of
one or both of the following—
(a)
non-trading finance profits;
(b)
property business profits.
371CB
Does Chapter 5 apply?
40
(1)
Subject to sections 371CC and 371CD, Chapter 5 (non-trading finance
profits) applies for a CFC’s accounting period if (and only if) the CFC
has non-trading finance profits.
(2)
In this section and Chapter 5 references to the CFC’s non-trading
finance profits are to those profits excluding any profits falling
45
within subsection (3) or (4) or Chapter 8 (solo consolidation).

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
433

(3)
Profits fall within this subsection so far as they arise from the
investment of funds held by the CFC for the purposes of a trade—
(a)
which is carried on by the CFC, and
(b)
no trading profits of which pass through the CFC charge
gateway for the accounting period.
5
(4)
Profits fall within this subsection so far as they arise from the
investment of funds held by the CFC for the purposes of a UK
property business or overseas property business carried on by the
CFC.
(5)
Neither subsection (3) nor subsection (4) applies in relation to
10
funds—
(a)
held only or mainly because of a prohibition or restriction on
the CFC paying dividends or making other distributions
imposed under the law of the territory in which the CFC is
incorporated or formed,
15
(b)
held with a view to paying dividends or making other
distributions at a time after the end of the relevant 12 month
period,
(c)
held with a view to acquiring shares in any company or
making any capital contribution to a person,
20
(d)
held with a view to acquiring, developing or otherwise
investing in land at a time after the end of the relevant 12
month period,
(e)
held only or mainly for contingencies, or
(f)
held only or mainly for the purpose of reducing or
25
eliminating a liability of any person to tax or duty imposed
under the law of any territory.
(6)
Subsection (5)(a) does not cover a prohibition or restriction which
ceases to have effect before the end of the relevant 12 month period.
(7)
“The relevant 12 month period” means the period of 12 months after
30
the end of the accounting period.
(8)
In the case of a chargeable company which makes a claim under
Chapter 9, in this section and Chapter 5 references to the CFC’s non-
trading finance profits are to those profits excluding also the CFC’s
qualifying loan relationship profits (as defined in Chapter 9).
35
371CC
Incidental non-trading finance profits: the 5% rule
(1)
This section applies in relation to a CFC’s accounting period if one or
both of the following requirements is met—
(a)
the CFC has trading profits or property business profits (or
both);
40
(b)
the CFC has exempt distribution income and, at all times
during the accounting period, a substantial part of its
business is the holding of shares or securities in companies
which are its 51% subsidiaries.
(2)
Chapter 5 does not apply for the accounting period if the CFC’s non-
45
trading finance profits are no more than 5% of the relevant amount.
(3)
“The relevant amount” is—

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
434

(a)
if the requirement of subsection (1)(a) is met, the total of the
CFC’s trading profits and property business profits
determined before deduction of interest or any tax or duty
imposed under the law of any territory,
(b)
if the requirement of subsection (1)(b) is met, the total of the
5
CFC’s exempt distribution income, or
(c)
if both those requirements are met, the sum of the totals given
by paragraphs (a) and (b).
(4)
Subsection (5) applies for the purposes of subsection (2) if—
(a)
the requirement of subsection (1)(b) is met (whether or not
10
the requirement of subsection (1)(a) is also met),
(b)
at any time during the accounting period, a 51% subsidiary of
the CFC (“the CFC subsidiary”) is also a CFC, and
(c)
the CFC subsidiary has relevant non-trading finance profits
as determined in accordance with subsection (6) or (7).
15
(5)
The CFC subsidiary’s relevant non-trading finance profits are to be
added to the CFC’s non-trading finance profits.
(6)
If—
(a)
the CFC subsidiary has an accounting period (“the relevant
period”) which is the same as the CFC’s accounting period or
20
otherwise falls wholly within the CFC’s accounting period,
and
(b)
by virtue of this section or section 371CD, Chapter 5 does not
apply (in the case of the CFC subsidiary) for the relevant
period,
25

the CFC subsidiary’s “relevant non-trading finance profits” are its
non-trading finance profits for the relevant period.
(7)
If—
(a)
the CFC subsidiary has an accounting period (“the relevant
period”) which otherwise overlaps with the CFC’s
30
accounting period, and
(b)
by virtue of this section or section 371CD, Chapter 5 does not
apply (in the case of the CFC subsidiary) for the relevant
period,

the CFC subsidiary’s “relevant non-trading finance profits” are a just
35
and reasonable proportion of its non-trading finance profits for the
relevant period.
(8)
In this section references to the CFC’s trading profits are to those
profits excluding any of them which pass through the CFC charge
gateway for the accounting period.
40
(9)
“Exempt distribution income” means any dividends or other
distributions which are not brought into account in determining the
CFC’s assumed total profits on the basis that they would be exempt
for the purposes of Part 9A of CTA 2009 (company distributions).
(10)
This section needs to be read with section 371CD.
45
371CD
Incidental non-trading finance profits: the further 5% rule
(1)
This section applies in relation to a CFC’s accounting period if—

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
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(a)
the requirements of section 371CC(1)(a) and (b) are both met,
but
(b)
the CFC’s non-trading finance profits (as added to under
section 371CC(5) if applicable) are more than 5% of the
relevant amount for the purposes of section 371CC(2).
5
(2)
Chapter 5 does not apply for the accounting period if the CFC’s
adjusted non-trading finance profits are no more than 5% of the total
of the CFC’s exempt distribution income (as defined in section
371CC(9)).
(3)
The CFC’s “adjusted non-trading finance profits” are its non-trading
10
finance profits excluding any profits falling within section 371CB(3)
or (4).
(4)
Subsection (5) applies if any CFC subsidiary’s relevant non-trading
finance profits are added under section 371CC(5) to the CFC’s non-
trading finance profits for the purposes of section 371CC(2).
15
(5)
The CFC subsidiary’s relevant non-trading finance profits are also to
be added to the CFC’s adjusted non-trading finance profits for the
purposes of subsection (2) above.
371CE
Does Chapter 6 apply?
(1)
Subject to what follows, Chapter 6 (trading finance profits) applies
20
for a CFC’s accounting period if (and only if)—
(a)
the CFC has trading finance profits, and
(b)
at any time during the accounting period, the CFC has funds
or other assets which derive (directly or indirectly) from UK
connected capital contributions.
25
(2)
The CFC’s trading finance profits are to be treated for the purposes
of this Part as if they were non-trading finance profits (and,
accordingly, Chapter 6 cannot apply for the accounting period) if—
(a)
the CFC is a group treasury company in the accounting
period, and
30
(b)
a notice is given to an officer of Revenue and Customs
requesting that the CFC’s trading finance profits be treated as
if they were non-trading finance profits.
(3)
Section 316(5) to (11) (group treasury companies) applies for the
purpose of determining if a CFC is a “group treasury company” as if
35
references to the relevant period were to the accounting period.
(4)
A notice under subsection (2)(b)—
(a)
may be given only by a company or companies determined
under subsection (5) or (6), and
(b)
must be given—
40
(i)
within 20 months after the end of the accounting
period, or
(ii)
within such longer period as an officer of Revenue
and Customs may allow.
(5)
A company may give a notice if—
45