Essentials: Finance Company Exemption under new UK Controlled Foreign Companies regime 

Hello everybody. My name is Robin Walduck and I’m a Partner in International Tax Services, and I’m here today to talk about the Finance Company Exemption under the new UK Controlled Foreign Companies regime.

As if running a multinational business wasn’t complex enough already, there’s the added complexity of dealing with the tax implications of funding foreign subsidiaries.

Many companies have set up complex funding arrangements to finance overseas companies in a cost-effective manner.  Those funding arrangements have often used tax planning techniques to minimise the tax they pay on the returns they generate on the financing.  The UK government has been steadily chipping away at loopholes in the law to deal with what they perceive to be inappropriate tax planning.

Separately, the UK government has been accused of being responsible for a tax system that is now unnecessarily complicated, and consequently several organisations have moved their HQ out of the UK.

The new Controlled Foreign Companies regime is an attempt to make the UK more attractive to multinational businesses.

From 1 January 2013, under the Finance Company Exemption, a UK group will be able to use an overseas finance company to lend to other foreign subsidiaries and pay UK tax on the interest income at a mere 5.5 %.

For example, a company that earns £10 million of interest income a year could save around £1.7 million on an after-tax basis.

Many companies will see these new regulations as an alternative to more complex (and arguably riskier) tax planning, making life simpler for both business and the tax authorities.

A range of businesses stand to benefit from the exemption, including those that have already made loans to foreign subsidiaries, are planning to make new loans or who are making an overseas acquisition.

The regime is of most benefit to UK headquartered companies, but is also of benefit to non-UK headquartered companies where the borrowers are owned through UK operations.

Like all tax rules, there is still considerable complexity, so companies will inevitably need plenty of help in deciding whether it’s worth setting up an overseas finance company, and if so, considering how to structure it to minimise foreign tax.