Finance (No. 3) Bill

Session 2010 - 11
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Finance (No. 3) Bill

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
175

(a)
in the case of section 748(1)(ba), one or both of the
following—
(i)
a failure to satisfy the requirement of paragraph 12E
of Schedule 25 (requirement as to company’s UK
connection) in circumstances where the requirement
5
would be satisfied if the reference in sub-paragraph
(3)(a) of that paragraph to 10% were a reference to
50%, and
(ii)
a failure to satisfy the requirement of paragraph 12F
of that Schedule (finance income and relevant IP
10
income) in circumstances where the relevant IP
income of the controlled foreign company for the
accounting period does not exceed 5% of the
company’s gross income for that period, and
(b)
in the case of section 748(1)(bb), a failure to satisfy the
15
requirement of paragraph 12M of that Schedule (finance
income).
(3)
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
20
accounting period (“the chargeable profits”) to be reduced to an
amount specified in the application (“the specified amount”).

The specified amount may be nil.
(4)
If the Commissioners grant the application—
(a)
the chargeable profits are treated as reduced to the specified
25
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
a just and reasonable basis, relates to the reduction in the
chargeable profits,
30

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).
(5)
The Commissioners may grant the application only if—
(a)
they are satisfied that the specified amount is not less than the
35
relevant amount, and
(b)
they have not previously granted an application made by the
UK resident company in respect of the relevant accounting
period under section 751A or 751AC.
(6)
“The relevant amount” means—
40
(a)
if the relevant failure is within subsection (2)(a), the sum of—
(i)
the excess finance and IP income (if any) for the
relevant accounting period, and
(ii)
in a case where there is a failure specified in
subsection (2)(a)(i), so much (if any) of the net
45
chargeable profits for that period as are not excluded
by subsection (8), and
(b)
if the relevant failure is within subsection (2)(b)—
(i)
the amount (if any) by which the controlled foreign
company’s finance income for the relevant
50

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
176

accounting period exceeds 5% of its gross income for
that period, or
(ii)
if that amount is a negligible amount, nil.
(7)
“The excess finance and IP income” for the relevant accounting
period means—
5
(a)
the amount (if any) by which the total of the controlled
foreign company’s finance income and relevant IP income for
that period exceeds 5% of its gross income for that period, or
(b)
if that amount is a negligible amount, nil.
(8)
Net chargeable profits are excluded by this subsection if, and to the
10
extent that, they can reasonably be regarded—
(a)
as representing the net economic value which—
(i)
arises to the appropriate body of persons (taken as a
whole), and
(ii)
is created directly by qualifying work, or
15
(b)
as not being wholly or partly attributable, directly or
indirectly, to transactions with persons within the charge to
United Kingdom tax.
(9)
In subsection (8)(a) “qualifying work” means work which—
(a)
is done in the territory in which the controlled foreign
20
company is resident, and
(b)
is done in that territory by individuals working for the
controlled foreign company there.
(10)
A transaction with a company which is within the charge to United
Kingdom tax only because it carries on a trade in the United
25
Kingdom through a permanent establishment there is within
subsection (8)(b) only if the transaction is attributable to activities
carried on through that establishment.
(11)
For the purposes of subsections (8) and (9)—
(a)
section 751A(5), (6) and (9) applies as it applies for the
30
purposes of the equivalent provisions of section 751A, and
(b)
paragraph 5(2) to (5) of Schedule 25 (residence of controlled
foreign company) applies as it applies in relation to Part 2 of
that Schedule.
(12)
In this section—
35
“finance income” has the meaning given by paragraph 12F(3) of
Schedule 25 (with references to C read as references to the
controlled foreign company);
“relevant IP income” has the meaning given by paragraph
12F(4) of that Schedule;
40
“net chargeable profits” means chargeable profits excluding so
much of those profits as is directly attributable to the finance
income or relevant IP income of the controlled foreign
company;
“UK-connected gross income” has the same meaning as in
45
paragraph 12E of Schedule 25;
“United Kingdom tax” means corporation tax or income tax;

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
177


and paragraph 12G of that Schedule (gross income) applies for the
purposes of this section as it applies for the purposes of Part 2A of
that Schedule (with references to C read as references to the
controlled foreign company).”
3
In Schedule 25 to that Act (cases where section 747(3) does not apply), after
5
Part 2 insert—
“Part 2A
trading companies with limited UK connection
Introductory
12B   (1)
For the purposes of section 748(1)(ba), a controlled foreign
10
company (“C”) is exempt for an accounting period if the
requirements of this Part of this Schedule are satisfied.
      (2)
The requirements are those imposed as to C’s—
(a)
business establishment (see paragraph 12C),
(b)
business activities (see paragraph 12D),
15
(c)
UK connection (see paragraph 12E), and
(d)
finance income and relevant IP income (see paragraph
12F).
Business establishment
12C   (1)
The requirement of this paragraph is that throughout the
20
accounting period C has a business establishment in the territory
in which it is resident.
      (2)
For the purposes of sub-paragraph (1)—
(a)
paragraph 5(2) to (5) (special rules about residence of the
company) applies as it applies for the purposes of Part 2 of
25
this Schedule, and
(b)
paragraph 7 (meaning of “business establishment”) applies
as it applies for the purposes of paragraph 6(1)(a).
Business activities
12D   (1)
The requirement of this paragraph is that—
30
(a)
C’s business does not, at any time during the accounting
period, include to a substantial extent non-exempt
activities, or
(b)
if C is wholly engaged in business falling within paragraph
11(1)(c) (banking etc), C’s business does not, at any time
35
during the accounting period, include to a substantial
extent non-exempt activities which do not constitute
investment business.
      (2)
For this purpose—
“non-exempt activities” means—
40
(a)
the holding or managing of shares or securities,
(b)
the holding of intellectual property,

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
178

(c)
dealing in securities, other than in the capacity of a
broker,
(d)
the leasing of any description of property or rights,
(e)
the investment in any manner of funds which would
otherwise be available, directly or indirectly, for
5
investment by or on behalf of any person (whether
resident in the United Kingdom or not) who has, or is
connected or associated with a person who has,
control, either alone or together with other persons, of
C, and
10
(f)
if C is not a member of an insurance group
throughout the accounting period, the effecting or
carrying out of contracts of insurance between C and
persons related to C;
“investment business” means activities within paragraphs (a)
15
to (d) of paragraph 9(1).
      (3)
For the purposes of sub-paragraph (2)(f), a person is “related” to C
if—
(a)
the person is connected or associated with C,
(b)
the person has a 25 per cent assessable interest in C in the
20
case of the accounting period in question (within the
meaning of paragraph 6(4C)), or
(c)
if C is a controlled foreign company in that accounting
period by virtue of subsection (1A) of section 747, the
person is connected or associated with either or both of the
25
two persons mentioned in that subsection.
      (4)
In sub-paragraph (2)—
“broker” includes any person offering to sell securities to, or
purchase securities from, members of the public generally;
“contract of insurance” has the meaning given by Article 3(1)
30
of the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001;
“insurance group” has the meaning given by paragraph
11A(4);
“intellectual property” is to be construed in accordance with
35
paragraph 9(1A);
“member of an insurance group” has the meaning given by
paragraph 11A(6).
UK connection
12E   (1)
The requirement of this paragraph is that C does not have a
40
significant connection with the United Kingdom during the
accounting period.
      (2)
C has a significant connection with the United Kingdom during
the accounting period if Condition A or B is met.
      (3)
Condition A is that—
45
(a)
the UK-connected gross income of C’s business for that
period exceeds 10% of the gross income of that business for
that period, and

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
179

(b)
subsection (4) does not apply.
      (4)
This subsection applies if—
(a)
at all times in the accounting period there are sufficient
individuals working for C in the territory in which it is
resident, or in any other territory outside of the United
5
Kingdom, who have the competence and authority to
undertake all, or substantially all, of C’s business,
(b)
C’s relevant profits for the accounting period do not
exceed 10% of C’s relevant operating expenses for that
period, and
10
(c)
the UK-connected gross income of C’s business for that
period does not exceed 50% of the gross income of that
business for that period.
      (5)
Condition B is that—
(a)
the UK-connected related-party business expenditure of
15
C’s business for that period exceeds 50% of the total
related-party business expenditure of C’s business for that
period, and
(b)
during the accounting period C has been involved in a
scheme where the main purpose, or one of the main
20
purposes, of any party to the scheme in entering into the
scheme is to achieve a reduction in corporation tax or any
tax chargeable as if it were corporation tax.
      (6)
For the purposes of sub-paragraph (4)(a), individuals are not to be
regarded as working for C in any territory unless—
25
(a)
they are employed by C in the territory, or
(b)
they are otherwise directed by C to perform duties on its
behalf in the territory.
      (7)
In this paragraph—
“related-party business expenditure” means any
30
expenditure, other than capital expenditure, which gives
rise, directly or indirectly, to income of a person related to
C;
“relevant profits”, for an accounting period, means the total
profits of C for that period calculated in accordance with
35
generally accepted accounting practice (disregarding any
capital gains or losses), but before any deduction for
interest or tax;
“relevant operating expenses” of C means operating
expenses of C other than—
40
(a)
the cost of goods sold, and
(b)
related-party business expenditure;
“scheme” means any scheme, arrangements or
understanding of any kind whatever, whether or not
legally enforceable, involving one or more transactions;
45
“UK-connected gross income” means the gross income
derived, directly or indirectly, from persons who are
within the charge to United Kingdom tax for all or part of
the accounting period;

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
180

“UK-connected related-party business expenditure” means
related-party business expenditure which gives rise,
directly or indirectly, to income of a person within the
charge to United Kingdom tax in respect of that income;
“United Kingdom tax” means income tax or corporation tax;
5

and paragraph 12D(3) (persons “related” to C) applies for the
purposes of this paragraph as it applies for the purposes of
paragraph 12D(2)(f).
      (8)
In the case of a company which is within the charge to United
Kingdom tax only because it carries on a trade in the United
10
Kingdom through a permanent establishment there, for the
purposes of sub-paragraph (7)—
(a)
the gross income derived from that company is so much of
the gross income as is attributable to that establishment,
and
15
(b)
the income received by that company is such of its income
as is attributable to that establishment.
Finance income and relevant IP income
12F   (1)
The requirement of this paragraph is that not more than 5% of C’s
gross income for the accounting period falls within sub-paragraph
20
(2).
      (2)
Gross income falls within this sub-paragraph to the extent that it
is—
(a)
finance income, or
(b)
relevant IP income.
25
      (3)
“Finance income” means—
(a)
any amount which in accordance with UK generally
accepted accounting practice falls to be recognised as
arising from a financial asset, and
(b)
any return, in relation to an amount, which—
30
(i)
is produced for C by an arrangement to which C is
party, and
(ii)
is economically equivalent to interest,

except to the extent that the return is taken into account in
determining an amount within paragraph (a).
35
      (4)
“Relevant IP income” means royalties and receipts of a similar
nature arising from intellectual property.
      (5)
For the purposes of sub-paragraph (3)(b), the amount of a return
is the amount which by virtue of the return would, in calculating
C’s chargeable profits, be treated under section 486B of CTA 2009
40
(disguised interest to be regarded as profit from loan relationship)
as a profit arising to C from a loan relationship.
      (6)
But, in calculating that profit for the purposes of sub-paragraph
(5), sections 486B(7) and 486C to 486E of CTA 2009 are to be
ignored.
45
      (7)
In this paragraph—

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
181

“economically equivalent to interest” is to be construed in
accordance with section 486B(2) and (3) of CTA 2009;
“financial asset” means a financial asset as defined for the
purposes of UK generally accepted accounting practice or
international accounting standards;
5
“intellectual property” is to be construed in accordance with
paragraph 9(1A).
Gross income
12G   (1)
References in this Part of this Schedule to C’s gross income are to
be construed in accordance with this paragraph.
10
      (2)
C’s gross income for an accounting period does not include—
(a)
any distribution that would not be included in C’s
chargeable profits by reason of it being exempt for the
purposes of Part 9A of CTA 2009 (see section 931A of that
Act), or
15
(b)
any amount that would be taken into account in
computing chargeable gains if C were within the charge to
corporation tax.
      (3)
C’s gross income for an accounting period includes—
(a)
any income which accrues during that period to the
20
trustees of a settlement in relation to which C is a settlor or
a beneficiary, and
(b)
any income which accrues during that period to a
partnership of which C is a partner, apportioned between
C and the other partners on a just and reasonable basis.
25
      (4)
Where there is more than one settlor or beneficiary in relation to
the settlement mentioned in sub-paragraph (3)(a), the income is to
be apportioned between C and the other settlors or beneficiaries
on a just and reasonable basis.
      (5)
In this paragraph—
30
“distribution” has the same meaning as in the Corporation
Tax Acts (see Part 23 of CTA 2010);
“partnership” includes an entity established under the law of
a country or territory outside the United Kingdom of a
similar character to a partnership; and “partner” is to be
35
read accordingly.
Part 2B
Companies exploiting intellectual property with limited UK
connection
Introductory
40
12H   (1)
For the purposes of section 748(1)(bb), a company (“C”) is exempt
for an accounting period if the requirements of this Part of this
Schedule are satisfied.
      (2)
The requirements are those imposed as to C’s—