Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 15 — Controlled foreign companies
195

Schedule 15
Section 47

Controlled foreign companies
Imputation of chargeable profits and creditable tax of controlled foreign companies
1     (1)
Section 747 of ICTA (imputation of chargeable profits and creditable tax of
controlled foreign companies) is amended as follows.
5
      (2)
After subsection (3) insert—
“(3A)
In the case of an apportionment to a company resident in the United
Kingdom which has made an application under section 751A which
has been granted, subsection (3) above has effect subject to that
section.”
10
      (3)
After subsection (5) insert—
“(5A)
Where the resident company has made an application under section
751A which has been granted, it shall be assumed for the purposes of
subsection (5) above that—
(a)
each of the persons who are connected or associated with the
15
resident company has made an application under that section
to the same effect, and
(b)
all the applications have been granted.”
Residence
2
In section 749 of ICTA (residence), insert at the end—
20
“(10)
For the purposes of subsection (8) and (9) above, the effect of any
application under section 751A shall be disregarded.”
Elections and designations under section 749: supplementary provisions
3
In section 749A of ICTA (elections and designations under section 749:
supplementary provisions), insert at the end—
25
“(9)
For the purposes of this section the effect of any application under
section 751A shall be disregarded.”
Territories with a lower level of taxation
4
In section 750(3) of ICTA (territories with a lower level of taxation), after the
“and” at the end of paragraph (a) insert—
30
“(ab)
there shall be disregarded the effect of any application under
section 751A; and”.
Reduction in chargeable profits for certain activities of EEA business establishments
5
In ICTA, after section 751 insert—
“751A
  Reduction in chargeable profits for certain activities of EEA
35
business establishments
(1)
This section applies if—

Finance Bill
Schedule 15 — Controlled foreign companies
196

(a)
an apportionment under section 747(3) falls to be made as
regards an accounting period (“the relevant accounting
period”) of a controlled foreign company,
(b)
throughout that period the controlled foreign company has a
business establishment in an EEA territory,
5
(c)
throughout that period there are individuals who work for
the controlled foreign company in that territory, and
(d)
a company resident in the United Kingdom (“the UK resident
company”) has a relevant interest in the controlled foreign
company in that period.
10
(2)
The UK resident company may make an application to the
Commissioners for Her Majesty’s Revenue and Customs for the
chargeable profits of the controlled foreign company for the relevant
accounting period to be reduced by an amount (“the specified
amount”) specified in the application (including to nil).
15
(3)
If the Commissioners grant the application—
(a)
those chargeable profits are treated as reduced by the
specified amount, and
(b)
the controlled foreign company’s creditable tax (if any) for
that period is treated as reduced by so much of that tax as, on
20
a just and reasonable basis, relates to the reduction in those
chargeable profits,

for the purpose of applying section 747(3) to (5) for determining the
sum (if any) chargeable on the UK resident company under section
747(4)(a) (but for no other purpose).
25
(4)
The Commissioners may grant the application only if they are
satisfied that the specified amount does not exceed the amount (if
any) equal to so much of those chargeable profits as can reasonably
be regarded as representing the net economic value which—
(a)
arises to the appropriate body of persons (taken as a whole),
30
and
(b)
is created directly by qualifying work.
(5)
For the purposes of subsection (4) “net economic value” does not
include any value which derives directly or indirectly from the
reduction or elimination of any liability of any person to any tax or
35
duty imposed under the law of any territory.
(6)
For the purposes of subsection (4) “the appropriate body of persons”
means—
(a)
if the controlled foreign company is not a member of a group
of companies, the controlled foreign company and the
40
persons who have an interest in it at any time in the relevant
accounting period, and
(b)
if the controlled foreign company is a member of a group of
companies, all the persons falling within paragraph (a) and
any other person who is a member of that group of
45
companies,

and for the purposes of this subsection “group of companies” means
a company and any other companies of which it has control.

Finance Bill
Schedule 15 — Controlled foreign companies
197

(7)
For the purposes of subsection (4) “qualifying work” means work
which—
(a)
is done in any EEA territory in which the controlled foreign
company has a business establishment throughout the
relevant accounting period, and
5
(b)
is done in that territory by individuals working for the
controlled foreign company there.
(8)
Any reference in this section to a business establishment of a
controlled foreign company in an EEA territory is to be construed in
accordance with paragraph 7 of Schedule 25 (but as if the reference
10
in that paragraph to the territory in which the company is resident
were to the EEA territory).
(9)
For the purposes of this section individuals are not to be regarded as
working for a company in any territory unless—
(a)
they are employed by the company in the territory, or
15
(b)
they are otherwise directed by the company to perform
duties on its behalf in the territory.
751B
Section 751A: supplementary
(1)
An application by a company under section 751A—
(a)
must be made in such form as the HMRC Commissioners
20
may determine,
(b)
must be accompanied by such documents (or copies of
documents) in the company’s possession or power as those
Commissioners may reasonably require for the purpose of
determining whether to grant the application, and
25
(c)
must contain such information as those Commissioners may
reasonably require for that purpose.
(2)
An application by a company under section 751A—
(a)
may be made at any time on or before the filing date (within
the meaning of Schedule 18 to the Finance Act 1998) for the
30
relevant company tax return of the company, and
(b)
may be amended or withdrawn at any time before the
application is determined by those Commissioners.
(3)
If an application by a company under section 751A is granted after
the company has delivered its relevant company tax return, it has 30
35
days beginning with the day on which the application is granted in
which to amend that return to give effect to section 751A.
(4)
The time limits otherwise applicable to an amendment of a company
tax return do not prevent an amendment being made under
subsection (3).
40
(5)
If the HMRC Commissioners refuse an application by a company
under section 751A, the company may appeal to the Special
Commissioners against the refusal.
(6)
Notice of an appeal must be given in writing to the HMRC
Commissioners within 30 days after the application is refused.
45
(7)
On an appeal—

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Schedule 15 — Controlled foreign companies
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(a)
if the Special Commissioners are satisfied that the relevant
amount is a different amount from the amount specified in
the application, they must direct the HMRC Commissioners
to grant the application as if the amount specified in it were
that different amount,
5
(b)
if the Special Commissioners are satisfied that the relevant
amount is the amount specified in the application, they must
direct the HMRC Commissioners to grant the application,
and
(c)
in any other case, the Special Commissioners must confirm
10
the refusal.
(8)
For the purposes of subsection (7) “the relevant amount” means the
amount (if any) equal to so much of the chargeable profits mentioned
in subsection (4) of section 751A as can reasonably be regarded as
representing the value mentioned in that subsection.
15
(9)
Part 5 of the Management Act (appeals against assessments to tax),
apart from section 50, applies in relation to an appeal under this
section as it applies in relation to an appeal against an assessment to
tax.
(10)
In this section “relevant company tax return”, in relation to a
20
company, means the return for the accounting period for which—
(a)
any sum is chargeable on the company under section
747(4)(a), or
(b)
any sum would be so chargeable but for section 751A,

in respect of the chargeable profits of the controlled foreign company
25
for the accounting period mentioned in section 751A(1).
(11)
In this section “the HMRC Commissioners” means the
Commissioners for Her Majesty’s Revenue and Customs.”
Interpretation
6
In section 756 of ICTA (interpretation and construction of Chapter 4 of Part
30
17), after subsection (1) insert—
“(1A)
In this Chapter “EEA territory”, in relation to any time, means a
territory which is an EEA state at that time other than the United
Kingdom.
(1B)
But a territory is not to be regarded for the purposes of subsection
35
(1A) above as an EEA state at any time if—
(a)
it is not a member State at that time, and
(b)
there are no arrangements made in relation to the territory
having effect by virtue of section 173 of the Finance Act 2006
(international tax enforcement arrangements) at that time.”
40
Exempt activities test
7     (1)
Part 2 of Schedule 25 to ICTA (supplementary provision in relation to cases
where apportionment under section 747(3) does not apply: exempt
activities) is amended as follows.

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Schedule 15 — Controlled foreign companies
199

      (2)
In paragraph 5, after sub-paragraph (1) insert—
   “(1A)
Except as provided in paragraph 8 below, the provisions of this
Part of this Schedule apply in relation to a company which is
resident in an EEA territory in the same way as they apply in
relation to a company which is resident elsewhere.”
5
      (3)
In paragraph 8, in sub-paragraph (1), after “fulfilled” insert “in relation to a
company which is not resident in an EEA territory”.
      (4)
Insert at the end of that paragraph—
    “(5)
The condition in paragraph 6(1)(b) above shall not be regarded as
fulfilled in relation to a company which is resident in an EEA
10
territory unless there are sufficient individuals working for the
company in the territory who have the competence and authority
to undertake all, or substantially all, of the company’s business.
      (6)
For the purposes of sub-paragraph (5) above, individuals are not
to be regarded as working for a company in any territory unless—
15
(a)
they are employed by the company in the territory, or
(b)
they are otherwise directed by the company to perform
duties on its behalf in the territory.”
Abolition of public quotation exemption
8     (1)
In section 748(1) of ICTA (cases where apportionment under section 747(3)
20
does not apply), omit paragraph (c) (together with the “or” at the end of it).
      (2)
In Schedule 25 to ICTA (supplementary provision in relation to cases where
apportionment under section 747(3) does not apply), omit Part 3 (the public
quotation condition).
Discovery assessments
25
9
In paragraph 44(3) of Schedule 18 to FA 1998 (discovery assessment:
situation not disclosed by return or related documents etc), in the definition
of “relevant claim”, insert at the end “or an application under section 751A
of the Taxes Act 1988 made by or on behalf of the company which affects the
company’s tax return for the period in question”.
30
Commencement
10    (1)
The amendments made by this Schedule have effect in relation to accounting
periods of controlled foreign companies beginning on or after 6th December
2006.
      (2)
In the case of an accounting period (a “straddling period”) of a controlled
35
foreign company—
(a)
beginning before 6th December 2006, and
(b)
ending on or after that date,

the amendments made by this Schedule have effect as if, for the purposes of
Chapter 4 of Part 17 of ICTA, so much of the straddling period as falls before
40
that date, and so much of the straddling period as falls on or after that date,
were separate accounting periods.

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 1 — Limit on number of employees of company in which investment is made
200

      (3)
The company’s chargeable profits for the straddling period, and its
creditable tax (if any) for that period, are to be apportioned to the two
separate accounting periods on a just and reasonable basis.
      (4)
Each of the following expressions—
“accounting period”,
5
“chargeable profits”,
“controlled foreign company”, and
“creditable tax”,

has the same meaning in this paragraph as in Chapter 4 of Part 17 of ICTA.
Schedule 16
10
Section 50

Venture capital schemes etc
Part 1
Limit on number of employees of company in which investment is made
Corporate venturing scheme
1     (1)
Part 3 of Schedule 15 to FA 2000 (requirements as to issuing company) is
15
amended as follows.
      (2)
In paragraph 15 (introduction to Part) after paragraph (f) insert—
“(fa)
number of employees (see paragraph 22A); and”.
      (3)
After paragraph 22 insert—
“The number of employees requirement
20
22A   (1)
If the issuing company is a single company, the full-time
equivalent employee number for it must be less than 50 when the
relevant shares are issued.
      (2)
If the issuing company is a parent company, the sum of—
(a)
the full-time equivalent employee number for it, and
25
(b)
the full-time equivalent employee numbers for each of its
qualifying subsidiaries,

must be less than 50 when the relevant shares are issued.
      (3)
The full-time equivalent employee number for a company is
calculated as follows—
30

Step 1

Find the number of full-time employees of the company.

Step 2

Add, for each employee of the company who is not a full-time
employee, such fraction as is just and reasonable.
35

The result is the full-time equivalent employee number.
      (4)
In this paragraph references to an employee—
(a)
include a director, but

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 1 — Limit on number of employees of company in which investment is made
201

(b)
do not include—
(i)
an employee on maternity or paternity leave, or
(ii)
a student on vocational training.”
      (4)
The amendments made by this paragraph do not have effect in relation to
shares issued before the day on which this Act is passed.
5
Enterprise investment scheme
2     (1)
Chapter 4 of Part 5 of ITA 2007 (the issuing company) is amended as follows.
      (2)
In section 180 (overview of Chapter 4), after paragraph (e) insert—
“(ea)
number of employees (see section 186A),”.
      (3)
After section 186 insert—
10
“186A
The number of employees requirement
(1)
If the issuing company is a single company, the full-time equivalent
employee number for it must be less than 50 when the relevant
shares are issued.
(2)
If the issuing company is a parent company, the sum of—
15
(a)
the full-time equivalent employee number for it, and
(b)
the full-time equivalent employee numbers for each of its
qualifying subsidiaries,

must be less than 50 when the relevant shares are issued.
(3)
The full-time equivalent employee number for a company is
20
calculated as follows—

Step 1

Find the number of full-time employees of the company.

Step 2

Add, for each employee of the company who is not a full-time
25
employee, such fraction as is just and reasonable.

The result is the full-time equivalent employee number.
(4)
In this section references to an employee—
(a)
include a director, but
(b)
do not include—
30
(i)
an employee on maternity or paternity leave, or
(ii)
a student on vocational training.”
      (4)
The amendments made by this paragraph do not have effect in relation to—
(a)
shares issued before the day on which this Act is passed, or
(b)
shares issued to the managers of an approved fund which closed
35
before that day.
      (5)
For the purposes of sub-paragraph (4)(b)—
(a)
“the managers of an approved fund” has the same meaning as in
section 251 of ITA 2007, and
(b)
the reference to shares issued to the managers of an approved fund
40
is to shares issued to those managers as nominee for an individual
who has invested in the fund.