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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).

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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.

 
 

 
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Revised 31 March 2011