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
182

(a)
business establishment (see paragraph 12I),
(b)
intellectual property business (see paragraph 12J),
(c)
other business activities (see paragraph 12K)
(d)
UK connection (see paragraph 12L), and
(e)
finance income (see paragraph 12M).
5
Business establishment
12I   (1)
The requirement of this paragraph is that throughout the
accounting period C has a business establishment in the territory
in which it is resident.
      (2)
For the purposes of sub-paragraph (1)—
10
(a)
paragraph 5(2) to (5) (special rules about residence of the
company) applies as it applies for the purposes of Part 2 of
this Schedule, and
(b)
paragraph 7 (meaning of “business establishment”) applies
as it applies for the purposes of paragraph 6(1)(a).
15
Intellectual property business
12J   (1)
The requirement of this paragraph is that C’s main business,
throughout the accounting period, consists of the exploitation of
intellectual property which does not have a relevant UK
connection.
20
      (2)
For the purposes of sub-paragraph (1), if any part of C’s main
business consists of the exploitation of intellectual property which
has a relevant UK connection, that part is to be ignored if it is an
insignificant part of C’s main business.
      (3)
Intellectual property has a relevant UK connection if—
25
(a)
at any time during the accounting period or the 6 years
immediately preceding that period, it has been held by a
person resident in the United Kingdom, or
(b)
activities relating to the creation, maintenance or
enhancement of the intellectual property (other than
30
activities of an incidental or insignificant nature) have been
carried on by a person who for some or all of the period—
(i)
beginning when the activities were first carried on
by the person, and
(ii)
ending at the end of the accounting period,
35

was related to C and within the charge to United Kingdom
tax.
Other business activities
12K   (1)
The requirement of this paragraph is that—
(a)
C does not, at any time during the accounting period, carry
40
on any activities otherwise than in the course of its main
business, or
(b)
if it carries on any such activities (“secondary activities”),
the secondary activities condition is met.

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 1 — Exemptions for companies with limited UK connection
183

      (2)
The secondary activities condition is that either—
(a)
the secondary activities do not, at any time during the
accounting period, constitute a substantial part of the
activities of C’s business taken as a whole, or
(b)
section 748(1)(b) or (ba) would apply to prevent an
5
apportionment under section 747(3) falling to be made as
regards that period, if C’s business consisted only of the
secondary activities carried on by it during the accounting
period.
UK connection
10
12L   (1)
The requirement of this paragraph is that C does not have a
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—
15
(a)
all or a substantial proportion of C’s gross income for that
period consists of income from the exploitation of
intellectual property which derives from persons within
the charge to United Kingdom tax, or
(b)
during that period C incurs expenditure (other than
20
expenditure of an incidental or insignificant nature) on—
(i)
R&D sub-contractor payments, or
(ii)
the creation, development or maintenance of
relevant intellectual property,

and that expenditure forms part of the income of a person
25
who for some or all of that period is related to C and within
the charge to United Kingdom tax.
      (3)
In this section—
“R&D sub-contractor payment” means a payment made by C
to another person in respect of research and development
30
contracted out by C to that person;
“relevant intellectual property” means intellectual property
which does not have a relevant UK connection (see
paragraph 12J(3)) and which C exploits in the course of its
main business.
35
Finance income
12M
The requirement of this paragraph is that not more than 5% of C’s
gross income for the accounting period consists of finance income
(within the meaning of paragraph 12F(3)).
Interpretation of Part 2B
40
12N   (1)
For the purpose of this Part of this Schedule—
“intellectual property” is to be construed in accordance with
paragraph 9(1A);
“United Kingdom tax” means corporation tax or income tax;

and paragraph 12G (meaning of “gross income”) applies as it
45
applies for the purposes of Part 2A of this Schedule.

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 2 — Amendment of small chargeable profits exception
184

      (2)
For the purposes of this Part of this Schedule a person is “related”
to C at a particular time if at that time—
(a)
the person is connected or associated with C,
(b)
the person has a 25 per cent assessable interest in C in the
case of the accounting period of C in which that time falls
5
(within the meaning of paragraph 6(4C)), or
(c)
if C is a controlled foreign company in the accounting
period in which that time falls by virtue of subsection (1A)
of section 747, the person is connected or associated with
either or both of the two persons mentioned in that
10
subsection.
      (3)
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
Kingdom through a permanent establishment there—
(a)
for the purposes of paragraphs 12J(3)(b), the activities
15
carried on by the company are such of the activities as are
carried on through that establishment,
(b)
for the purposes of paragraph 12L(2)(a), the income
derived from that company is such of the income so
derived as is attributable to that establishment, and
20
(c)
for the purposes of paragraph 12L(2)(b), the income of that
company is such of its income as is attributable to that
establishment.”
Part 2
Amendment of small chargeable profits exception
25
4     (1)
Section 748 of ICTA (cases where apportionment of chargeable profits and
creditable tax under section 747(3) does not apply) is amended as follows.
      (2)
In subsection (1), after paragraph (d) insert—
“(da)
the relevant profits for the accounting period, after any
adjustment required by subsection (3C), do not exceed—
30
(i)
£200,000, or
(ii)
if the accounting period is less than 12 months, a
proportionately reduced amount; or”.
      (3)
After subsection (3) insert—
“(3A)
The reference in subsection (1)(da) to the relevant profits for an
35
accounting period are to the sum of—
(a)
the profits of the company for that period calculated in
accordance with generally accepted accounting practice
(disregarding any exempt distributions and any capital gains
or losses), before any adjustment required or authorised by
40
law in calculating chargeable profits,
(b)
any amount which accrues during that period to the trustees
of a settlement in relation to which the company is a settlor or
a beneficiary, and
(c)
the company’s share of any income which accrues during
45
that period to a partnership of which the company is a
partner.

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 2 — Amendment of small chargeable profits exception
185

(3B)
For the purposes of subsection (3A)—
(a)
“exempt distribution” means a distribution (within the
meaning of Part 23 of CTA 2010) which would be excluded
from the company’s chargeable profits by reason of it being
exempt for the purposes of Part 9A of CTA 2009 (company
5
distributions),
(b)
where there is more than one settlor or beneficiary in relation
to the settlement mentioned in subsection (3A)(b), the income
is to be apportioned between the company and the other
settlors or beneficiaries on a just and reasonable basis, and
10
(c)
the company’s share of any income which accrues to a
partnership as mentioned in subsection (3A)(c) is to be
determined by apportioning that income between the
company and the other partners on a just and reasonable
basis;
15

and in subsection (3A) and this subsection “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 read accordingly.
(3C)
For the purposes of subsection (1)(da), Part 4 of TIOPA 2010 (transfer
20
pricing) applies in relation to the calculation of the relevant profits
for the accounting period as it applies in relation to the calculation of
the chargeable profits for that period.
(3D)
But where the difference made in the amount of the relevant profits
for the period as a result of the application of subsection (3C) would
25
(disregarding this subsection) not exceed £50,000, no adjustment
under that subsection is to be made.”
      (4)
In subsection (6) for “section” substitute “sections 748ZA and”.
5
After that section insert—
“748ZA
Exclusion of small profits exemptions
30
(1)
Nothing in section 748(1)(da) prevents an apportionment falling to
be made as regards an accounting period (“the relevant accounting
period”) of a controlled foreign company (“X”) if condition A, B or C
is met.
(2)
Condition A is that at any time before the end of the relevant
35
accounting period a scheme is entered into and—
(a)
in the absence of this subsection, in consequence of the
scheme, section 748(1)(da) would apply to prevent an
apportionment falling to made as regards the relevant
accounting period of X, and
40
(b)
the main purpose, or one of the main purposes, of any party
to the scheme in entering into the scheme is to secure that
section 748(1)(da) prevents an apportionment falling to be
made as regards that period, or that period and one or more
other accounting periods of X.
45
(3)
Condition B is that at any time before the end of the relevant
accounting period a scheme is entered into and—
(a)
in consequence of the scheme profits are shifted to X from
another company (“Y”),

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 3 — Temporary exemption following reorganisation etc
186

(b)
the main purpose or one of the main purposes of any party to
the scheme in entering into the scheme is to ensure that
section 748(1)(da) prevents an apportionment falling to be
made as regards the chargeable profits of one or more
controlled foreign companies for one or more accounting
5
periods, and
(c)
the relevant accounting period of X falls wholly or partly
within that accounting period or those accounting periods.
(4)
For the purposes of subsection (3), profits are shifted to X from Y if it
is reasonable to suppose that in the absence of the scheme, and any
10
similar scheme, the whole or a part of the income which is reflected
in X’s profits would have been reflected in Y’s profits.
(5)
Condition C is that, in determining X’s chargeable profits for the
relevant accounting period—
(a)
section 418(5) of CTA 2009 (loan relationships involving
15
connected debtor and creditor where debits exceed credits)
has effect so as to treat X, for the purposes of Part 5 of that
Act, as bringing into account for that period credits in respect
of a loan relationship, or
(b)
Part 21B of CTA 2010 (group mismatch schemes) has effect so
20
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).
(6)
For the purposes of this section—
“apportionment” means an apportionment under section
25
747(3);
“scheme” means any scheme, arrangements or understanding
of any kind whatever, whether or not legally enforceable,
involving one or more transactions.”
Part 3
30
Temporary exemption following reorganisation etc
6     (1)
Section 748 of ICTA (cases where section 747(3) does not apply) is amended
as follows.
      (2)
After subsection (1)(e) insert “; or
(f)
the accounting period ends during an exempt period in
35
relation to the company (see Part 3A of Schedule 25).”
      (3)
In subsection (3) for “(e)” substitute “(f)”.
7
After section 751AB of that Act (inserted by paragraph 2 of this Schedule)
insert—
“751AC
Reduction in chargeable profits following an exempt period
40
(1)
This section applies if—
(a)
an exempt period in relation to a controlled foreign company
ends in accordance with paragraph 15F(2) of Schedule 25
(time exempt period ends if there is an early termination
event), other than by reason of an early termination event
45
within paragraph 15F(3)(b),

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 3 — Temporary exemption following reorganisation etc
187

(b)
an accounting period (“the relevant accounting period”) of
the company ends after that exempt period but before the
time the exempt period would have ended had paragraph
15F(2) of that Schedule not applied,
(c)
an apportionment under section 747(3) would fall to be made
5
as regards the relevant accounting period, 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.
(2)
The UK resident company may make an application to the
10
Commissioners for Her Majesty’s Revenue and Customs for the
chargeable profits of the controlled foreign company for that
accounting period (“the chargeable profits”) to be reduced to an
amount (“the specified amount”) specified in the application (which
may be nil).
15
(3)
If the Commissioners grant the application—
(a)
the chargeable profits are treated as reduced to 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 the
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—
(a)
they are satisfied that the specified amount is not less than the
relevant amount, and
(b)
they have not previously granted an application made by the
UK resident company in respect of the relevant accounting
30
period under section 751A or 751AB.
(5)
“The relevant amount” means the amount (if any) equal to so much
of the chargeable profits as it is just and reasonable to regard as
referable to—
(a)
the relevant transaction which triggered the end of the
35
exempt period, or
(b)
any later relevant transaction occurring before the time the
exempt period would have ended had paragraph 15F(2) of
Schedule 25 not applied.
(6)
“Relevant transaction” has the meaning given by paragraph 15E of
40
Schedule 25 (and it does not matter if the transaction occurs pursuant
to an agreement entered into by the controlled foreign company
before the relevant time (within the meaning of paragraph 15G of
that Schedule)).”
8
In Schedule 25 to that Act (cases where section 747(3) does not apply), before
45

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 3 — Temporary exemption following reorganisation etc
188

Part 4 of that Schedule insert—
“Part 3A
Exempt periods
Introductory
15A
The provisions of this Part of this Schedule have effect for the
5
purposes of section 748(1)(f).
Beginning of exempt period
15B
An exempt period begins in relation to a company (“X”) at the time
it becomes a controlled foreign company (“the relevant time”), but
only if the requirements of paragraph 15C or 15D are met.
10
15C   (1)
The requirements of this paragraph are that—
(a)
X was not, at any time before the relevant time, under the
control of persons resident in the United Kingdom,
(b)
no asset owned by X, or part of the business carried on by
X, at the relevant time was previously owned, or carried
15
on, by a company which—
(i)
was under such control at any time it owned the
asset or carried on the part of the business, and
(ii)
is or has been related to X,
(c)
condition A, B, C or D is met, and
20
(d)
no disqualifying relevant transaction occurs (see
paragraph 15E).
      (2)
Condition A is that, immediately before the relevant time, X—
(a)
was in existence, but
(b)
was not a member of the same group of companies as any
25
person who, at the relevant time, was a controlling UK
person.
      (3)
Condition B is that—
(a)
at the relevant time X is controlled by a company which is
resident in the United Kingdom, and
30
(b)
immediately before that time, X was controlled by that
same company but that company was not then resident in
the United Kingdom.
      (4)
Condition C is that—
(a)
at the relevant time—
35
(i)
X is controlled by a company which is resident in
the United Kingdom (“the intermediate parent”),
and
(ii)
the intermediate parent is controlled by a company
which is not resident in the United Kingdom (“the
40
parent”), and
(b)
immediately before that time X was controlled by the
parent but not the intermediate parent.