Global Tax Adviser
January 3, 2012

United Kingdom — Proposed CFC Rules Widen U.K. Tax Net

Penny Woolford
GTA, International Corporate Tax

The United Kingdom's recently released draft legislation for its new controlled foreign corporation (CFC) regime provides that where the Finance Company Partial Exemption (Exemption) applies, 25% of an overseas finance company’s qualifying finance income will be subject to a CFC charge. This provision will result in a U.K. effective tax rate of 6.25% in 2012, which will decrease to 5.75% by 2014.

The CFC rules, expected to be introduced in 2012, focus on taxing foreign profits that have been diverted from the United Kingdom and will affect U.K. resident companies with overseas subsidiaries and exempt foreign branches.

Background
Under the new CFC regime, where a CFC’s chargeable profits fail certain criteria and are not otherwise exempt, they will be apportioned to the United Kingdom and taxed to any U.K. resident company with a 25% assessable interest in the CFC. The CFC charge will be reduced by a credit for any foreign tax attributable to the apportioned profits and by the offset of relevant U.K. reliefs, such as the Exemption.

Proposed Exemption
The Exemption will normally exempt all but 25% of the chargeable profits derived from qualifying loans from a CFC charge. As a result, profits from overseas intra-group financing will be taxed at a U.K. effective tax rate of 6.25% in 2012, and 5.75% by 2014.

The Exemption will apply to mixed activity companies (not just "standalone" finance companies). To qualify as a loan, the ultimate debtor must generally be a non-resident connected company. The foreign company will need to have a business premise in its country of residence, but there will be no specific local management requirements.

The U.K. government is considering whether a full exemption could apply to finance company income in certain circumstances.

For more information, contact your KPMG adviser.

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