Global Tax Adviser
January 3, 2012
United Kingdom — Proposed CFC Rules Widen U.K. Tax
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.
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.
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.
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.