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

442

 

371DF   

Exclusion: trading profits (the basic rule)

(1)   

All trading profits are to be excluded from the provisional Chapter 4

profits if the following conditions are met—

(a)   

the business premises condition (see section 371DG),

(b)   

the income condition (see section 371DH),

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(c)   

the management expenditure condition (see section 371DI),

(d)   

the IP condition (see section 371DJ), and

(e)   

the export of goods condition (see section 371DK).

(2)   

Trading profits are also to be excluded from the provisional Chapter

4 profits in accordance with section 371DI(7) and (8) (so far as

10

applicable).

(3)   

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

371DG   

Exclusion: trading profits (business premises condition)

(1)   

This section applies for the purposes of section 371DF(1)(a).

(2)   

The business premises condition is met if, at all times during the

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accounting period, the CFC has in the territory in which it is resident

for the accounting period premises—

(a)   

which are, or are intended to be, occupied and used with a

reasonable degree of permanence, and

(b)   

from which the CFC’s activities in that territory are wholly or

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mainly carried on.

(3)   

“Premises” means—

(a)   

an office, shop, factory or other building or part of a building,

(b)   

a mine, an oil or gas well, a quarry or other place of extraction

of natural resources, or

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(c)   

a building site or the site of a construction or installation

project, but only if the building work or project has a duration

of at least 12 months.

371DH   

Exclusion: trading profits (income condition)

(1)   

This section applies for the purposes of section 371DF(1)(b).

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(2)   

The income condition is met if no more than 20% of the CFC’s

relevant trading income derives (directly or indirectly) from—

(a)   

UK resident persons, or

(b)   

UK permanent establishments of non-UK resident

companies.

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(3)   

For the purposes of subsection (2) the CFC’s “relevant trading

income” is its trading income, excluding any income arising from the

sale in the United Kingdom of goods produced by the CFC in the

territory in which it is resident for the accounting period.

(4)   

Subsection (5) applies instead of subsection (2) if, at any time during

40

the accounting period, the CFC’s main business is banking business

in relation to which the CFC is regulated in the territory in which it

is resident for the accounting period.

 
 

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

443

 

(5)   

The income condition is met if the CFC’s relevant UK trading income

is no more than 10% of the CFC’s trading income.

(6)   

The CFC’s “relevant UK trading income” is its trading income so far

as it derives (directly or indirectly) from—

(a)   

UK resident persons, or

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(b)   

UK permanent establishments of non-UK resident

companies,

   

but excluding interest received from UK resident companies which

are connected or associated with the CFC.

(7)   

Neither subsection (2)(a) nor subsection (6)(a) covers income

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deriving (directly or indirectly) from a UK resident company if—

(a)   

the company has made an election under section 18A of CTA

2009 (exemption for profits or losses of foreign permanent

establishments), and

(b)   

an expense corresponding to the income is brought into

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account for the purpose of determining any exemption

adjustment in relation to the company under that section.

371DI   

Exclusion: trading profits (management expenditure condition)

(1)   

This section applies for the purposes of section 371DF(1)(c).

(2)   

The management expenditure condition is met if the UK related

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management expenditure is no more than 20% of the total related

management expenditure.

(3)   

“The total related management expenditure” is the total of the

following expenditure incurred during the accounting period by the

CFC—

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(a)   

expenditure incurred in the employment of any member of

the CFC’s staff who carries out relevant management

functions,

(b)   

expenditure incurred in the engagement (directly or

indirectly) of any individual who is not a member of the

30

CFC’s staff but who carries out relevant management

functions in consequence of an arrangement between the

individual and the CFC, and

(c)   

expenditure incurred in the engagement (directly or

indirectly) of any company related to the CFC so far as the

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expenditure represents expenditure incurred by the related

company in—

(i)   

the employment of any member of the related

company’s staff who carries out relevant

management functions, or

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(ii)   

the engagement by the related company (directly or

indirectly) of any individual who is not a member of

the related company’s staff but who carries out

relevant management functions in consequence of an

arrangement between the individual and the related

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company.

(4)   

“The UK related management expenditure” is the total related

management expenditure so far as it relates to members of staff or

 
 

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

444

 

other individuals who carry out relevant management functions in

the United Kingdom.

(5)   

A person carries out a “relevant management function” if the person

manages or controls any assets or risks included in the relevant

assets and risks.

5

(6)   

This covers (for example) a person who formulates plans or makes

decisions in relation to—

(a)   

the acquisition, creation, development or exploitation of such

assets, or

(b)   

the taking on, or bearing, of such risks.

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(7)   

Subsection (8) applies if—

(a)   

the conditions mentioned in section 371DF(1)(a), (b), (d) and

(e) are met but the management expenditure condition is not

met,

(b)   

there is an asset or risk which is included in the relevant

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assets and risks and to which any part of the total related

management expenditure relates,

(c)   

the 50% condition is met in relation to that asset or risk, and

(d)   

trading profits arising from that asset or risk are included in

the provisional Chapter 4 profits.

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(8)   

The trading profits are to be excluded from the provisional Chapter

4 profits.

(9)   

The 50% condition is met in relation to an asset or risk if the UK

related management expenditure so far as relating to the asset or risk

is no more than 50% of the total related management expenditure so

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far as relating to the asset or risk.

(10)   

Subsection (11) applies if—

(a)   

any part of the total related management expenditure relates

to a number of assets or risks included in the relevant assets

and risks, and

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(b)   

it is not reasonably practicable to separate those assets or

risks for the purpose of determining the extent to which the

total related management expenditure relates to each of those

assets or risks separately.

(11)   

Subsections (7) to (9) apply in relation to those assets or risks taken

35

together and references to an asset or risk are to be read accordingly.

371DJ   

Exclusion: trading profits (IP condition)

(1)   

This section applies for the purposes of section 371DF(1)(d).

(2)   

The IP condition is met unless—

(a)   

the CFC’s assumed total profits include amounts arising

40

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

persons related to the CFC at times during the

45

relevant period, or

 
 

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

445

 

(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

the CFC,

(c)   

as a result of those transfers or other derivations, the value of

5

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

(d)   

if only parts of the exploited IP were so transferred or

derived, the significance condition is met.

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(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

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(b)   

as a result of the transfers or other derivations of the UK

derived IP, the CFC’s assumed total profits 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

20

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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371DK   

Exclusion: trading profits (export of goods condition)

(1)   

This section applies for the purposes of section 371DF(1)(e).

(2)   

The export of goods condition is met if no more than 20% of the

CFC’s trading income arises from goods exported from the United

Kingdom, excluding goods exported from the United Kingdom to

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the territory in which the CFC is resident for the accounting period.

371DL   

Exclusion: trading profits (anti-avoidance)

(1)   

This section applies if—

(a)   

a condition mentioned in section 371DF(1) is met, or

(b)   

the 50% condition mentioned in section 371DI is met in

40

relation to an asset or risk (or a number of assets or risks taken

together),

   

but it is reasonable to suppose that that would not be the case apart

from an arrangement falling within subsection (3).

(2)   

The condition is to be taken not to be met or (as the case may be) not

45

to be met in relation to the asset or risk (or the assets or risks taken

together).

 
 

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

446

 

(3)   

An arrangement falls within this subsection if—

(a)   

the arrangement involves the CFC group organising (or

reorganising) a significant part of its business in a particular

way, and

(b)   

the main purpose, or one of the main purposes, of that

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organising (or reorganising) is to secure that—

(i)   

one or more of the conditions mentioned in section

371DF(1) are met, or

(ii)   

the 50% condition mentioned in section 371DI is met

in relation to one or more assets or risks.

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Chapter 5

The CFC charge gateway: non-trading finance profits

371EA   

The basic rule

(1)   

The CFC’s profits falling within this Chapter for the purposes of step

2 in section 371BB(1) (the CFC charge gateway) are its non-trading

15

finance profits so far as they fall within any of sections 371EB to

371EE.

(2)   

In this Chapter references to the CFC’s non-trading finance profits

are to be read in accordance with section 371CB(2) and, so far as

applicable, section 371CB(8).

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371EB   

UK activities

(1)   

To determine the extent to which the CFC’s non-trading finance

profits fall within this section, take steps 1 to 5 and 7 in section

371DB(1) as if references in section 371DB to the CFC’s assumed total

profits were references to its non-trading finance profits.

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(2)   

Non-trading finance profits fall within this section so far as they

would be included in the provisional Chapter 4 profits as

determined on the basis mentioned in subsection (1).

371EC   

Capital investment from the UK

(1)   

Non-trading finance profits fall within this section so far as they arise

30

from relevant UK funds or other assets.

(2)   

Subsection (3) applies in relation to any profits which (apart from

subsection (3)) would fall within this section if—

(a)   

an amount of expenditure incurred by the CFC in managing

the relevant UK funds or other assets itself was brought into

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account in calculating the profits, and

(b)   

it is reasonable to suppose that the amount of expenditure is

less than the fee which a company not connected with the

CFC would charge the CFC for carrying out the same

management activities.

40

(3)   

There is to be deducted from the profits an amount representing

what it is reasonable to suppose the difference between the amount

of expenditure and the fee would be.

(4)   

“Relevant UK funds or other assets” means—

 
 

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

447

 

(a)   

funds or other assets which derive (directly or indirectly)

from any capital contribution to the CFC made (directly or

indirectly) by a UK connected company (whether in relation

to an issue of shares in the CFC or otherwise),

(b)   

funds or other assets which represent, or derive (directly or

5

indirectly) from, any amounts included in the CFC’s

chargeable profits for any earlier accounting period in

relation to which the CFC charge is charged,

(c)   

funds or other assets which represent, or derive (directly or

indirectly) from, any amounts which, by virtue of section 174

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(transfer pricing: claims by disadvantaged person), are left

out of account in determining the CFC’s assumed total

profits for the accounting period or any earlier accounting

period, or

(d)   

funds or other assets—

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(i)   

which represent, or derive (directly or indirectly)

from, any funds or other assets received by the CFC

(directly or indirectly) from a UK connected

company, and

(ii)   

which are not covered by paragraphs (a) to (c).

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(5)   

In subsection (4)(d)(i) the reference to funds or other assets received

by the CFC does not include funds or other assets received—

(a)   

in exchange for goods or services provided by the CFC, or

(b)   

by way of a loan.

(6)   

“UK connected company” means—

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(a)   

a UK resident company connected with the CFC, or

(b)   

a non-UK resident company connected with the CFC acting

through a UK permanent establishment.

371ED   

Arrangements in lieu of dividends etc to UK resident companies etc

(1)   

Non-trading finance profits fall within this section so far as they arise

30

from an arrangement (other than a relevant finance lease) in relation

to which the following condition is met.

(2)   

The condition is that—

(a)   

the arrangement is made by the CFC (directly or indirectly)—

(i)   

with a UK resident company connected with the CFC,

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or

(ii)   

with a non-UK resident company connected with the

CFC for the purposes of a UK permanent

establishment of the non-UK resident company, and

(b)   

it is reasonable to suppose—

40

(i)   

that the arrangement is made as an alternative to the

CFC paying dividends or making any other

distribution to the other company (directly or

indirectly), and

(ii)   

that the main reason, or one of the main reasons, for

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that is a reason relating to a liability, or potential

liability, of any person to tax or duty imposed under

the law of any territory.

 
 

 
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Revised 9 May 2012