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 3 — Temporary exemption following reorganisation etc
189

      (5)
Condition D is that X—
(a)
is a controlled foreign company at the time it is formed,
and
(b)
is formed by one or more persons for the purpose of
controlling one or more companies in circumstances where
5
it is expected that an exempt period will begin in relation
to one or more of those companies at the time when X
begins to control the company or companies.
      (6)
In this paragraph “controlling UK person” means a person
resident in the United Kingdom who alone, or together with other
10
such persons, controls X.
15D
The requirements of this paragraph are that—
(a)
the relevant time falls after 23 March 2011,
(b)
X has an accounting period during which 23 March 2011
falls,
15
(c)
X was not, during that accounting period, controlled by
persons resident in the United Kingdom,
(d)
X was not, immediately before the relevant time,
controlled by such persons,
(e)
at the relevant time X is controlled by a company which—
20
(i)
is resident in the United Kingdom, and
(ii)
is not under the control of another body corporate,
or two or more other bodies corporate taken
together, and
(f)
no disqualifying relevant transaction occurs (see
25
paragraph 15E).
Disqualifying relevant transactions
15E   (1)
This paragraph applies for the purposes of paragraph 15C and
15D.
      (2)
A disqualifying relevant transaction occurs if—
30
(a)
a relevant transaction occurs at the relevant time (whether
or not the transaction occurs pursuant to an agreement
entered into by X before that time), or
(b)
a relevant transaction occurs on or after 9 December 2010
but before the relevant time and that transaction forms
35
part of an avoidance scheme.
      (3)
“Relevant transaction” means—
(a)
the making by X of a loan or advance of an amount (other
than a negligible amount) to a person who, at the time it is
made, is related to X and subject to United Kingdom tax,
40
(b)
an increase (other than an increase of a negligible amount)
in the amount of an existing loan or advance made by X to
a person who, at the time of the increase, is related to X and
subject to United Kingdom tax,
(c)
a change in the terms or conditions of an existing loan or
45
advance made by X where—

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 3 — Temporary exemption following reorganisation etc
190

(i)
the loan or advance is to a person who, at the time
the change is made, is related to X and subject to
United Kingdom tax, and
(ii)
the change has an effect (other than a negligible
effect) on the amount of interest payable, or
5
(d)
a transaction to which sub-paragraph (4) applies.
      (4)
This sub-paragraph applies to a transaction if—
(a)
it is referable to an activity carried on by X as part, or the
whole, of any non-exempt activities carried on by X,
(b)
the results of the transaction are reflected in the profits
10
arising in an accounting period of X and are not negligible
in value, and
(c)
the results of the transaction alone, or together with the
results of one or more other transactions, achieves a
reduction in United Kingdom tax.
15
      (5)
A transaction achieves, or two or more transactions together
achieve, a reduction in United Kingdom tax if, had the transaction
or transactions not been effected, any person—
(a)
would have been liable for any such tax or for a greater
amount of any such tax, or
20
(b)
would not have been entitled to a relief from or repayment
of any such tax or would have been entitled to a smaller
relief from or repayment of any such tax.
      (6)
In this paragraph—
“avoidance scheme” means a scheme the main purpose, or
25
one of the main purposes, of any party to which in entering
into the scheme is to secure that section 748(1)(f) prevents
an apportionment falling to be made under section 747(3)
as regards an accounting period, or accounting periods, of
X;
30
“non-exempt activities” has the meaning given by paragraph
12D(2);
“scheme” means any scheme, arrangements or
understanding of any kind whatever, whether or not
legally enforceable, involving one or more transactions;
35
“United Kingdom tax” means corporation tax (or any tax
chargeable as if it were corporation tax) or income tax.
Ending of exempt period
15F   (1)
An exempt period ends on the expiry of the period of 24 months
which begins immediately after the first accounting period of X to
40
end after the relevant time, unless sub-paragraph (2) applies.
      (2)
If an early termination event occurs after the relevant time but
before the time the exempt period would end under sub-
paragraph (1), the exempt period ends immediately before that
event.
45
      (3)
An early termination event occurs if and when—

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 4 — Holding companies: extension of transitional provision
191

(a)
a relevant transaction occurs, whether or not the
transaction occurs pursuant to an agreement entered into
by X before that time, or
(b)
where the exempt period began because Condition D was
met, X’s business does not consist wholly in the holding of
5
shares of companies which X controls, together with
activities incidental to the holding of such shares.
Interpretation of Part 3A
15G   (1)
In this Part of this Schedule—
“group” means a company and any other companies it
10
controls;
“the relevant time” has the meaning given by paragraph 15B;
“relevant transaction” has the meaning given by paragraph
15E;
“X” is to be construed in accordance with paragraph 15B.
15
      (2)
For the purposes of this Part of this Schedule a person is “related”
to X at a particular time if—
(a)
the person is connected or associated with X at that time,
(b)
the person has a 25 per cent assessable interest in X in the
case of the accounting period in which that time falls
20
(within the meaning of paragraph 6(4C)), or
(c)
if X 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
25
subsection.”
Part 4
Holding companies: extension of transitional provision
9     (1)
Part 2 of Schedule 16 to FA 2009 (controlled foreign companies: amendment
of exempt activities exemption) is amended as follows.
30
      (2)
In paragraph 12 (commencement), in sub-paragraph (2)(b) for “2011”
substitute “2012”.
      (3)
In paragraph 15 (qualifying holding companies: periods straddling 1 July
2011)—
(a)
in sub-paragraph (1)(a) for “2011” substitute “2012”,
35
(b)
in sub-paragraph (2)(a) for “2011” substitute “2012”, and
(c)
accordingly, in the heading for “2011” substitute “2012”.
      (4)
In paragraph 16 (qualifying holding companies: definition of “relevant
accounting period”), in paragraph (b) for “2011” substitute “2012”.
      (5)
In the italic heading before paragraph 17 for “two years before 1 July 2011”
40
substitute “three years before 1 July 2012”.

Finance (No. 3) Bill
Schedule 12 — Controlled foreign companies
Part 5 — Minor and consequential amendments
192

Part 5
Minor and consequential amendments
10
In the following provisions for “or 751AA” substitute “, 751AA, 751AB or
751AC”—
(a)
section 747(3A) and (5A) (imputation of chargeable profits and
5
creditable tax of controlled foreign companies),
(b)
section 749(10) (residence),
(c)
section 749A(9) (elections and designations under section 749:
supplementary provisions), and
(d)
section 750(3)(ab) (territories with a lower level of taxation).
10
11
In section 751A (reduction in chargeable profits for certain activities of EEA
business establishments), for subsection (4) substitute—
“(4)
The Commissioners may grant the application only if—
(a)
they are satisfied that the specified amount does not exceed
the amount (if any) equal to so much of those chargeable
15
profits as can reasonably be regarded 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, and
20
(b)
they have not previously granted an application made by the
UK resident company in respect of the relevant accounting
period under section 751AB or 751AC.”
12    (1)
Section 751B (sections 751A and 751AA: supplementary) is amended as
follows.
25
      (2)
For “or 751AA” in subsections (1), (2), (3) (in each place) and (5) substitute “,
751AA, 751AB or 751AC”.
      (3)
In subsection (2), for paragraph (a) substitute—
“(a)
may be made at any time before the end of the application
period, and”
30
      (4)
In subsection (8), omit the “and” before paragraph (b), and after that
paragraph insert—
“(c)
in the case of an appeal in respect of the refusal of an
application under section 751AB, has the meaning given by
subsection (6) of that section, and
35
(d)
in the case of an appeal in respect of the refusal of an
application under section 751AC, has the meaning given by
subsection (5) of that section.”
      (5)
For subsection (10) substitute—
“(10)
In this section—
40
“the application period” means—
(a)
the period within which an amendment to the
relevant company tax return may be made by virtue
of paragraph 15(4) of Schedule 18 to the Finance Act
1998 (disregarding any extension of that period
45

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009
193

provided by subsections (3) and (4) of this section or
any other enactment), or
(b)
if the relevant company tax return is amended under
paragraph 34(2)(b) or (2A) of that Schedule as a
consequence of the application of this Chapter—
5
(i)
the period of 30 days beginning when the
amendment was notified to the company, or
(ii)
if an appeal is brought against such an
amendment, the period of 30 days beginning
when that appeal is finally determined;
10
“relevant company tax return”, in relation to a 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,
15
751AA, 751AB or 751AC,
in respect of the chargeable profits of the company for the
accounting period mentioned in section 751A, 751AA, 751AB
or 751AC.”
      (6)
In the heading for “and 751AA” substitute “to 751AC”.
20
13
Omit the following provisions—
(a)
in Schedule 17 to FA 1998, paragraph 3(7), and
(b)
in Schedule 16 to FA 2009, paragraphs 22 and 24(3) and (5).
Part 6
Commencement and transitional provision
25
14    (1)
The amendments made by paragraph 9 are treated as always having had
effect.
      (2)
The other amendments made by this Schedule have effect in relation to
accounting periods of controlled foreign companies beginning on or after 1
January 2011.
30
Schedule 13
Section 48

Profits of foreign permanent establishments etc
Part 1
Amendments of CTA 2009
1
CTA 2009 is amended as follows.
35
2
In section 1(1)(c) (overview of Act), for “Chapter 4” substitute “Chapters 3A
and 4”.
3
In section 5(1) (territorial scope), insert at the end “(but see Chapter 3A for
an exemption from charge in respect of profits of foreign permanent
establishments)”.
40

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009
194

4
After section 18 insert—
           “Chapter 3A
          UK resident companies: profits of foreign permanent establishments
Exemption
18A
Exemption for profits or losses of foreign permanent establishments
5
(1)
If a UK resident company makes an election under this section,
exemption adjustments are to be made at the appropriate stages in
calculating the taxable total profits of the company for each relevant
accounting period.
(2)
For that purpose “exemption adjustments” means any such
10
adjustments as are appropriate to secure that there are left out of
account any profits and losses taken into account in arriving at the
foreign permanent establishments amount in relation to any relevant
accounting period.
(3)
In this Chapter “relevant accounting period”, in relation to a
15
company by which an election is made under this section, means an
accounting period of the company to which the election applies (as
to which see section 18F).
(4)
For the purposes of this Chapter the “foreign permanent
establishments amount”, in relation to an accounting period of a
20
company, is—
(a)
the aggregate of the relevant profits amount in the case of
each relevant foreign territory in relation to which there is a
relevant profits amount for the accounting period, less
(b)
the aggregate of the relevant losses amount in the case of each
25
relevant foreign territory in relation to which there is a
relevant losses amount for the accounting period.
(5)
In this Chapter “relevant foreign territory”, in relation to a company,
means a territory outside the United Kingdom in which the company
carries on, or has carried on, business through a permanent
30
establishment.
(6)
For the purposes of this Chapter “relevant profits amount”, in
relation to a relevant foreign territory and an accounting period of a
company, means—
(a)
in the case of a full treaty territory, profits which would be
35
taken to be attributable to the permanent establishment of the
company in the territory for the purpose of ascertaining the
amount of any credit to be allowed under TIOPA 2010 (in
respect of tax paid under the law of the relevant foreign
territory) against corporation tax if the company were to be
40
liable to corporation tax for the accounting period (apart from
this Chapter), or
(b)
in the case of any other territory, profits which would be
taken to be so attributable for that purpose if the territory
were a full treaty territory and the double taxation
45

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009
195

arrangements having effect in relation to the territory were in
the terms of the OECD model.
(7)
For the purposes of this Chapter “relevant losses amount”, in relation
to a relevant foreign territory and an accounting period of a
company, means—
5
(a)
in the case of a full treaty territory, any losses which would
be taken to be attributable to the permanent establishment of
the company in the territory on the application of the same
rules and principles as fall to be applied under subsection
(6)(a), and
10
(b)
in the case of any other territory, any losses which would be
taken to be so attributable on that basis if it were a full treaty
territory and the double taxation arrangements having effect
in relation to the relevant foreign territory were in the terms
of the OECD model.
15
(8)
Subsection (9) applies if the amount of any credit to be allowed under
TIOPA 2010 in relation to a company in the case of a full treaty
territory does not depend on the profits taken to be attributable to the
permanent establishment of the company in the territory because tax
under the law of the territory is charged, pursuant to the double
20
taxation arrangements having effect in relation to the territory,
otherwise than by reference to such profits (as an alternative to a
charge by reference to such profits).
(9)
The reference in subsection (6)(a) to profits which would be taken to
be attributable to the permanent establishment of the company in the
25
territory is to the profits that would be so taken if tax under the law
of the territory were charged by reference to such profits; and
subsection (7)(a) is to be construed accordingly.
(10)
For the purposes of subsections (6) and (7) if double taxation
arrangements having effect in relation to a relevant foreign territory
30
do not include provision for the credit to be allowed against tax to be
computed by reference to the same profits as those by reference to
which the tax was computed under the law of the relevant foreign
territory, they are to be assumed to do so.
(11)
This section is subject to the following provisions of this Chapter.
35
18B
Chargeable gains etc
(1)
The exemption adjustments required to be made by section 18A(1)
include, in the case of any gains or losses on the disposal or
realisation of assets which are relevant in the calculation of the
taxable total profits of a company for a relevant accounting period,
40
adjustments to remove the effect of any gains or losses relating to the
assets taken into account in computing the foreign permanent
establishments amount in relation to any relevant accounting period
(so that, in appropriate cases, a gain may be increased to reflect a loss
so taken into account or a loss increased to reflect a gain so taken into
45
account).
(2)
The references in section 18A(6) to profits which would be taken to
be attributable to the permanent establishment of a company in a
territory include any gains in respect of immoveable property which