Finance Bill

Session 2012 - 13
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
471

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)
an arrangement is entered into at any time,
5
(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
arrangement is to secure that the low profits exemption
10
applies—
(i)
for the relevant accounting period, or
(ii)
for that period and one or more other accounting
periods of the CFC.
(3)
Condition B is that, at any time during the relevant accounting
15
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)
a UK resident individual (“the service provider”) personally
20
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
between the service provider and the client but under an
25
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
profits for the accounting period, Part 21B of CTA 2010 (group
30
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
35
The 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
40
(1)
The 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.
45

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
472

(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
used by the CFC in the territory in which it is resident for the
5
accounting period, and
(b)
any expenditure which gives rise, directly or indirectly, to
income of a person related to the CFC.
371MC
Anti-avoidance
The low profit margin exemption does not apply for a CFC’s
10
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
relevant accounting period, and
15
(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)
for that period and one or more other accounting
20
periods of the CFC.
Chapter 14
The tax exemption
371NA
Introduction to Chapter
This Chapter sets out an exemption called “the tax exemption” for
25
the 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
30

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

If no territory of residence can be determined by applying section
371TB, the tax exemption cannot apply and no further steps are to be
taken.
35

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
arising in the accounting period (applying section 371NC so far as
relevant).
40

If the local tax amount is determined under designer rate tax
provisions (see section 371ND), the tax exemption cannot apply and
step 3 is not to be taken.

Step 3

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
473


In accordance with section 371NE, determine the amount of the
corresponding UK tax for the accounting period.

The tax exemption applies if the local tax amount is at least 75% of
the corresponding UK tax.
(2)
Subsection (3) applies if an amount of tax is paid in the CFC’s
5
territory by a person (whether or not the CFC) in respect of any of the
CFC’s local chargeable profits arising in the accounting period taken
together with other amounts.
(3)
For the purposes of step 2 in subsection (1) the amount of tax is to be
apportioned between the CFC’s local chargeable profits in question
10
and the other amounts on a just and reasonable basis.
(4)
In this Chapter references to the CFC’s local chargeable profits are to
its profits as determined for tax purposes under the law of the CFC’s
territory, ignoring any capital gains or losses.
371NC
Reductions to “the local tax amount”
15
(1)
This section applies for the purposes of step 2 in section 371NB(1).
(2)
The local tax amount is to be reduced to what it would have been—
(a)
had any income, or any income and expenditure (where the
income exceeds the expenditure), to which subsection (3)
applies not been brought into account in determining the
20
CFC’s local chargeable profits arising in the accounting
period in respect of which tax is paid in the CFC’s territory,
and
(b)
had any expenditure to which subsection (4) applies been
brought into account in determining those profits.
25
(3)
This subsection applies to any income, or any income and
expenditure, of the CFC—
(a)
which is brought into account in determining the CFC’s local
chargeable profits arising in the accounting period in respect
of which tax is paid in the CFC’s territory, but
30
(b)
which does not fall to be brought into account in determining
the CFC’s assumed taxable total profits for the accounting
period.
(4)
This subsection applies to any expenditure of the CFC—
(a)
which is not brought into account in determining the CFC’s
35
local chargeable profits arising in the accounting period in
respect of which tax is paid in the CFC’s territory, but
(b)
which does fall to be brought into account in determining the
CFC’s assumed taxable total profits for the accounting
period.
40
(5)
Subsection (6) applies if—
(a)
in the CFC’s territory any tax falls to be paid by the CFC in
respect of the CFC’s local chargeable profits arising in the
accounting period,
(b)
under the law of that territory, any repayment of tax, or any
45
payment in respect of a credit for tax, is made to a person
other than the CFC, and

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
474

(c)
that repayment or payment is directly or indirectly in respect
of the whole or part of the tax mentioned in paragraph (a).
(6)
The local tax amount is to be reduced (or further reduced after any
reduction under subsection (2)) by the amount of that repayment or
payment.
5
371ND
What are “designer rate tax provisions”?
(1)
For the purposes of step 2 in section 371NB(1) “designer rate tax
provisions” means provisions—
(a)
which appear to the HMRC Commissioners to be designed to
enable companies to exercise significant control over the
10
amount of tax which they pay, and
(b)
which are specified in regulations made by the HMRC
Commissioners.
(2)
Regulations under subsection (1) may make different provision for
different cases or with respect to different territories.
15
371NE
How to determine “the corresponding UK tax”
(1)
For the purposes of step 3 in section 371NB(1) “the corresponding
UK tax” is the amount of corporation tax which, applying the
corporation tax assumptions, would be charged in respect of the
CFC’s assumed taxable total profits for the accounting period.
20
(2)
In determining that amount of corporation tax—
(a)
ignore any relief from corporation tax attributable to the local
tax amount which would be given to the CFC by virtue of
Part 2 (double taxation relief) in respect of any income, and
(b)
deduct from what would otherwise be that amount of
25
corporation tax—
(i)
any amount which, applying the corporation tax
assumptions, would be set off against corporation tax
on the CFC’s assumed taxable total profits by virtue
of section 967 of CTA 2010 (cases in which a company
30
receives a payment bearing income tax), and
(ii)
any amount of income tax or corporation tax actually
charged in respect of any income included in the
CFC’s assumed taxable total profits.
(3)
In subsection (2)(b) the references to an amount being set off or an
35
amount actually charged do not include so much of any such amount
as has been or falls to be repaid to the CFC whether on the making of
a claim or otherwise.

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
475

Chapter 15
Relevant interests in a CFC
Introduction
371OA
Application of Chapter
This Chapter applies for the purpose of determining the persons who
5
have “relevant interests” in a CFC for the purposes of step 1 in
section 371BC(1).
371OB
Provision about interpretation
(1)
This section applies for the purposes of this Chapter.
(2)
A person’s interest in a company is an “indirect” interest so far as the
10
person has the interest by virtue of having an interest in another
company; and references to a “direct” interest in a company are to be
read accordingly.
(3)
An interest held by an open-ended investment company within the
meaning of Chapter 2 of Part 13 of CTA 2010 (see sections 613 and
15
615) is treated as held by the company’s shareholders in proportion
to their shareholdings.
(4)
An interest held by the trustees of an authorised unit trust is treated
as held by the persons who have rights under the trust in proportion
to their rights.
20
(5)
An interest held by a bare trustee or nominee (including by virtue of
subsection (3) or (4)) is treated as held by the person or persons for
whom the bare trustee or nominee holds the interest.
(6)
“Bare trustee” means a person acting as trustee for—
(a)
a person absolutely entitled as against the trustee,
25
(b)
two or more persons who are so entitled,
(c)
a person who would be so entitled but for being a minor or
otherwise lacking legal capacity, or
(d)
two or more persons who would be so entitled but for all or
any of them being a minor or otherwise lacking legal
30
capacity.
(7)
Subsection (8) applies in a case not covered by subsection (5) if—
(a)
an interest is held in a fiduciary or representative capacity
(including by virtue of subsection (3) or (4)), and
(b)
there are one or more identifiable beneficiaries.
35
(8)
The interest is taken to be held by that beneficiary or, as the case may
be, apportioned between those beneficiaries on a just and reasonable
basis.
What is a “relevant interest” in a CFC?
371OC
“Relevant interests” of UK resident companies
40
(1)
A UK resident company’s interest in a CFC is a “relevant interest”,
except so far as subsection (2) applies to it.

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
476

(2)
This subsection applies to the interest so far as it is an indirect interest
which the UK resident company has by virtue of having an interest
in another UK resident company.
371OD
“Relevant interests” of persons related to UK resident companies
(1)
This section applies if, by virtue of section 371OC, a UK resident
5
company (“UKRC”) has a relevant interest in a CFC.
(2)
A related person’s interest in the CFC is a “relevant interest”, except
so far as subsection (4) or (5) applies to it.
(3)
“Related person” means a person, other than a UK resident
company, who is connected or associated with UKRC.
10
(4)
This subsection applies to the related person’s interest so far as it is
an indirect interest which the related person has by virtue of having
an interest in a UK resident company or another related person.
(5)
This subsection applies to the interest so far as it is the same as
UKRC’s relevant interest in the CFC by virtue of UKRC having an
15
interest in the related person.
371OE
Other “relevant interests”
(1)
This section applies if a person (“P”) has a direct interest in a CFC
which is not a relevant interest by virtue of section 371OC or 371OD.
(2)
P’s direct interest is a “relevant interest”, except so far as subsection
20
(3) applies to it.
(3)
This subsection applies to P’s direct interest so far as it is the same as
another person’s relevant interest in the CFC by virtue of the other
person having an interest in P.
(4)
In subsection (3) the reference to another person’s relevant interest is
25
to another person’s relevant interest by virtue of section 371OC or
371OD.
Chapter 16
Creditable tax of a CFC
371PA
What is “creditable tax”?
30
(1)
For the purposes of step 2 in section 371BC(1) a CFC’s creditable tax
for an accounting period is the total of—
(a)
the amount of any relief from corporation tax attributable to
any foreign tax which, applying the corporation tax
assumptions, would be given to the CFC by virtue of Part 2
35
(double taxation relief) in respect of any income included or
represented in the CFC’s chargeable profits for the
accounting period,
(b)
any amount of relevant income tax which, applying the
corporation tax assumptions, would be set off against
40
corporation tax on the CFC’s chargeable profits for the
accounting period by virtue of section 967 of CTA 2010 (cases
in which a company receives a payment bearing income tax),

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
477

(c)
any amount of income tax or corporation tax actually charged
in respect of any income included or represented in the CFC’s
chargeable profits for the accounting period, and
(d)
any amount of a foreign CFC charge paid in respect of any
income included or represented in the CFC’s chargeable
5
profits for the accounting period.
(2)
In subsection (1)(a) “foreign tax” means—
(a)
the local tax amount, or
(b)
any tax under the law of a relevant foreign territory.
(3)
In subsection (1)(b) “relevant income tax” means income tax which
10
the CFC bears by deduction on a payment so far as the payment is
included or represented in the CFC’s chargeable profits.
(4)
In subsection (1)(d) “foreign CFC charge” means a charge under the
law of a relevant foreign territory (by whatever name known) which
is similar to the CFC charge.
15
(5)
In subsection (1)(b) to (d) references to an amount being set off, an
amount actually charged or an amount paid do not include so much
of any such amount as has been or falls to be repaid to the CFC or any
other person whether on the making of a claim or otherwise.
(6)
“Relevant foreign territory” means a territory outside the United
20
Kingdom other than the territory in which the CFC is resident for the
accounting period.
Chapter 17
Apportionment of a CFC’s chargeable profits and creditable tax
Introduction
25
371QA
Application of Chapter
This Chapter applies for the purpose of apportioning a CFC’s
chargeable profits and creditable tax for an accounting period among
the relevant persons as required by step 3 in section 371BC(1).
371QB
Provision about interpretation
30
(1)
This section applies for the purposes of this Chapter.
(2)
Section 371OB applies as it applies for the purposes of Chapter 15.
(3)
“Ordinary shares”, in relation to any company, means shares of a
single class, however described, which is the only class of share
issued by the company.
35
(4)
For the purposes of subsection (3)—
(a)
“share” includes a fraction of a share, and
(b)
shares issued by a company which are paid up to different
amounts are not to be taken to be of a single class.
(5)
A person (“P”) holds ordinary shares in the CFC “indirectly” if P
40
directly holds ordinary shares in a company which is share-linked to
the CFC.