Finance (No. 2) Bill - continued        House of Commons
SCHEDULE 17, CONTROLLED FOREIGN COMPANIES - continued

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Paragraph 3 of Schedule 25
      28. In paragraph 3(4A) of Schedule 25 to the Taxes Act 1988 (meaning of "net chargeable profits") in paragraph (b), for "a direction were given under section 747(1)" there shall be substituted "an apportionment under section 747(3) fell to be made".
 
 
Paragraph 5 of Schedule 25
      29. In paragraph 5(2)(a) of Schedule 25 to the Taxes Act 1988, for "749(3)" there shall be substituted "749(5)".
 
 
Paragraph 6 of Schedule 25
      30. - (1) Paragraph 6 of Schedule 25 to the Taxes Act 1988 (exemption for controlled foreign companies engaged in exempt activities) shall be amended as follows.
 
      (2) In sub-paragraph (1)(c) (which provides that for a company to be engaged in exempt activities, any of sub-paragraphs (2) to (4) must apply) for "(4)" there shall be substituted "(4A)".
 
      (3) In sub-paragraph (2)(b) (which in certain cases requires less than 50 per cent. of gross trading receipts to be derived from connected or associated persons or persons who have an interest in the company at any time during the accounting period) for "an interest in the company at any time during" there shall be substituted "a 25 per cent. assessable interest in the company in the case of".
 
      (4) In sub-paragraph (3) (local holding companies) in paragraph (b) (controlled companies which are not themselves holding companies but which are otherwise engaged in exempt activities)-
 
 
    (a) after "holding companies" there shall be inserted "or superior holding companies"; and
 
    (b) after "exempt activities" there shall be inserted "or are, in terms of sub-paragraph (5A) below, exempt trading companies".
      (5) In sub-paragraph (4) (holding companies other than local holding companies) in paragraph (b) (controlled companies which are not holding companies but which are otherwise engaged in exempt activities)-
 
 
    (a) after "holding companies (whether local or not)" there shall be inserted "or superior holding companies"; and
 
    (b) after "exempt activities" there shall be inserted "or are, in terms of sub-paragraph (5A) below, exempt trading companies".
      (6) After sub-paragraph (4) there shall be inserted-
 
 
    "(4A) This sub-paragraph applies to a company which is a superior holding company if at least 90 per cent. of its gross income during the accounting period in question-
 
 
    (a) represents qualifying exempt activity income of its subsidiaries; and
 
    (b) is derived directly from companies which it controls and which fall within sub-paragraph (4B) below.
      (4B) For the purposes of paragraph (b) of sub-paragraph (4A) above, a company falls within this sub-paragraph if-
 
 
    (a) throughout the accounting period mentioned in that sub-paragraph, it is not itself a superior holding company but otherwise is, in terms of this Schedule, engaged in exempt activities or is, in terms of sub-paragraph (5A) below, an exempt trading company; or
 
    (b) it is itself a superior holding company throughout that period and at least 90 per cent of its gross income during that period-
 
      (i) represents qualifying exempt activity income of its subsidiaries, and
 
      (ii) is derived directly from companies which it controls and which themselves fall within this paragraph or paragraph (a) above."
      (7) After sub-paragraph (4B) there shall be inserted-
 
 
    "(4C) For the purposes of sub-paragraph (2)(b) above, a person has a 25 per cent. assessable interest in a controlled foreign company in the case of an accounting period of the company if, on an apportionment of the chargeable profits and creditable tax (if any) of the company for that accounting period under section 747(3), at least 25 per cent. of the controlled foreign company's chargeable profits for the accounting period would be apportioned to that person."
 
      (8) In sub-paragraph (5) (extended meaning of references in sub-paragraph (3) or (4) to companies which a holding company controls)-
 
 
    (a) for "sub-paragraph (3) or (4)" there shall be substituted "sub-paragraphs (3) to (4B)"; and
 
    (b) after "holding company", in each place where it occurs, there shall be inserted "or superior holding company".
      (9) After sub-paragraph (5) there shall be inserted-
 
 
    "(5A) For the purposes of sub-paragraphs (3) to (4B) above, a company is an exempt trading company throughout any period if-
 
 
    (a) it is a trading company throughout each of its accounting periods which falls wholly or partly within that period; and
 
    (b) each of those accounting periods is one as regards which-
 
      (i) the condition in section 747(1)(c) is not satisfied; or
 
      (ii) the conditions in section 748(1)(e) are satisfied; or
 
      (iii) the conditions in section 748(3)(a) and (b) are satisfied."
 
Paragraph 8 of Schedule 25
      31. - (1) Paragraph 8 of Schedule 25 to the Taxes Act 1988 (which relates to the condition in paragraph 6(1)(b) of that Schedule) shall be amended as follows.
 
      (2) In sub-paragraph (3) (which applies sub-paragraph (2) with modifications in relation to a holding company) after "In the case of a holding company" there shall be inserted "or superior holding company".
 
 
Paragraph 12 of Schedule 25
      32. - (1) Paragraph 12 of Schedule 25 to the Taxes Act 1988 (meaning of "holding company" in paragraphs 6 and 8(3)) shall be amended as follows.
 
      (2) In sub-paragraph (1), after "in paragraphs 6 and 8(3) above and" there shall be inserted "paragraph 12A below and in".
 
      (3) In sub-paragraph (5) (exclusion of income derived from certain sources) in paragraph (a)-
 
 
    (a) after "which is not a holding company" there shall be inserted "or superior holding company"; and
 
    (b) after "engaged in exempt activities" there shall be inserted "or, in terms of sub-paragraph (5A) of that paragraph, is an exempt trading company".
 
Superior holding companies: supplementary provisions
      33. After paragraph 12 of Schedule 25 to the Taxes Act 1988 there shall be inserted-
 
 
    "12A. - (1) In paragraphs 6, 8(3) and 12(5) above and this paragraph, "superior holding company" means-
 
 
    (a) a company whose business consists wholly or mainly in the holding of shares or securities of companies which-
 
      (i) are holding companies or local holding companies; or
 
      (ii) are themselves superior holding companies; or
 
    (b) a company which would fall within paragraph (a) above if there were disregarded so much of its business as consists in the holding of property or rights of any description for use wholly or mainly by companies which it controls and which are resident in the territory in which it is resident.
      (2) For the purposes of sub-paragraphs (4A) and (4B) of paragraph 6 above, the income of a company during any period which "represents qualifying exempt activity income of its subsidiaries" is any income of the company during that period which is directly or indirectly derived from companies-
 
 
    (a) which it controls, and
 
    (b) which, throughout that period, fall within sub-paragraph (4B)(a) of that paragraph, but
 
    (c) which are not holding companies other than local holding companies.
      (3) In determining for the purposes of sub-paragraph (4A) or (4B) of paragraph 6 above the companies from which, and the proportions in which, different descriptions of income of a company are derived (whether directly or indirectly), any dividend shall be taken to be paid out of the appropriate profits.
 
      (4) Subsections (3) and (4) of section 799 (which provide rules for determining the profits out of which a dividend is to be regarded as paid for the purpose of subsection (1) of that section) shall apply for determining the appropriate profits for the purposes of subsection (3) above as they apply for determining the relevant profits for the purposes of subsection (1) of that section.
 
      (5) Sub-paragraphs (4) to (6) of paragraph 12 above shall apply in relation to sub-paragraph (4A) or (4B) of paragraph 6 above and a superior holding company as they apply in relation to sub-paragraph (3) or (4) of paragraph 6 above and a holding company, but taking the reference in sub-paragraph (4) of paragraph 12 above to paragraph (a) or (b) of sub-paragraph (1) of that paragraph as a reference to paragraph (a) or (b) of sub-paragraph (1) above."
 
 
Paragraph 1 of Schedule 26
      34. - (1) In Schedule 26 to the Taxes Act 1988 (reliefs against liability for tax in respect of chargeable profits apportioned to UK resident company) paragraph 1 (trading losses and group relief etc) shall be amended as follows.
 
      (2) In sub-paragraph (1) (set-off against liability to tax under section 747(4)(a) where UK resident company entitled to deduction in respect of relevant allowance) the following provisions shall cease to have effect-
 
 
    (a) paragraph (c) (set-off only available if company has no profits or relevant allowance exceeds profits) and the word "and" immediately preceding that paragraph; and
 
    (b) in the words following paragraph (c), the words "or, as the case may be, of the excess of it referred to in paragraph (c) above".
      (3) In sub-paragraph (2)(a) (which defines the appropriate accounting period as that for which by virtue of section 754(2) the company is regarded as assessed to corporation tax in respect of the chargeable profits concerned) for "regarded as assessed to corporation tax" there shall be substituted "chargeable to tax by virtue of this Chapter".
 
      (4) Sub-paragraph (4) (time limit for making claims for group relief) shall cease to have effect.
 
      (5) Sub-paragraph (6) (which modifies section 43 of the Taxes Management Act 1970 in its application for the purposes of the paragraph) shall cease to have effect.
 
 
Paragraph 3 of Schedule 26
      35. - (1) Paragraph 3 of Schedule 26 to the Taxes Act 1988 (gains on disposal of shares in controlled foreign companies) shall be amended as follows.
 
      (2) In sub-paragraph (1), for paragraph (a) (which refers to a direction having been given in respect of an accounting period of a controlled foreign company) there shall be substituted-
 
 
    "(a) an accounting period of a controlled foreign company ("the apportionment period") is one in respect of which an apportionment under section 747(3) falls to be made; and".
      (3) Accordingly, in paragraphs (b) and (c) of sub-paragraph (1), for the words "the direction period", in each place where they occur, there shall be substituted "the apportionment period".
 
      (4) In paragraph (d) of sub-paragraph (1) (which refers to a sum being, under section 747(1)(a), assessed and recoverable from a company) for "assessed on and recoverable from" there shall be substituted "chargeable on".
 
      (5) In sub-paragraph (3), for "the direction period" there shall be substituted "the apportionment period".
 
      (6) In sub-paragraph (4), in the words following paragraph (c), for "assessed and recoverable" there shall be substituted "chargeable under section 747(4)(a)".
 
      (7) After subsection (6) there shall be inserted-
 
 
    "(6A) Nothing in-
 
 
    (a) paragraph 10 of Schedule 18 to the Finance Act 1998 (claims or elections in company tax returns), or
 
    (b) Schedule 1A to the Management Act (claims or elections not included in returns),

shall apply, whether by virtue of section 754 or otherwise, to a claim under sub-paragraph (6) above."
 
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