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SI 2012/3024 The Controlled Foreign Companies (Excluded Territories) Regulations 2012

Made - - - - 3rd December 2012
Laid before the House of Commons 5th December 2012
Coming into force - - 1st January 2013

The Commissioners for Her Majesty’s Revenue and Customs make these Regulations in exercise of the powers conferred by section 371KB(2) and (3) of the Taxation (International and Other Provisions) Act 2010.

Citation, commencement and effect

1.—(1) These Regulations may be cited as the Controlled Foreign Companies (Excluded Territories) Regulations 2012 and come into force on 1st January 2013.

(2) These Regulations have effect for accounting periods of CFCs beginning on or after 1st January 2013.

Interpretation

2. In these Regulations—

“TIOPA 2010” means the Taxation (International and Other Provisions) Act 2010;

“the Schedule” means the Schedule to these Regulations.

Excluded territories

3. A territory listed in Part 1 of the Schedule is an excluded territory for the purposes of Chapter 11 of Part 9A of TIOPA 2010 (the excluded territories exemption).

Modified excluded territories exemption to apply in specified cases

4.—(1) For the purposes of Chapter 11 of Part 9A of TIOPA 2010, the requirements of section 371KB(1)(b) and (c) of that Act do not have to be met in order for the excluded territories exemption to apply for a CFC’s accounting period if—

(a) for the purposes of that Chapter, the CFC is for the accounting period resident in—

(i) Australia,

(ii) Canada,

(iii) France,

(iv) Germany,

(v)  Japan, or

(vi) the United States of America;

(b) requirement A is met (if applicable); and

(c) requirement B is met.

(2) Requirement A is applicable only if the CFC is resident as mentioned in paragraph (1)(a) by virtue of section 371TA(1)(b) of TIOPA 2010.

(3) Requirement A is that the CFC would still be resident as mentioned in paragraph (1)(a) were the following subsections to be substituted for section 371KC(3) of TIOPA 2010—

“(3) But section 371TA(1)(b) is to be applied only if the CFC or persons with interests in the CFC are subject to taxation under the law of the territory in question on all of the CFC’s income arising during the accounting period.

(3A) For the purposes of subsection (3), the CFC’s income does not include any dividend or other distribution received, other than one for which the company paying the dividend or other distribution is entitled to a deduction against its profits for tax purposes under the law of the territory in which it is resident.”.

(4) Requirement B is that at no time during the accounting period is the CFC’s business carried on, to any extent, through a permanent establishment which the CFC has in a territory outside the territory in which it is resident for the accounting period for the purposes of Chapter 11 of Part 9A of TIOPA 2010.

Further requirement to be met for excluded territories exemption to apply

5. For the purposes of Chapter 11 of Part 9A of TIOPA 2010, Part 2 of the Schedule specifies a further requirement which must be met in order for the excluded territories exemption to apply for a CFC’s accounting period.

Jim Harra
Edward Troup
Two of the Commissioners for Her Majesty’s Revenue and Customs
3rd December 2012

SCHEDULE

Regulations 3 and 5

PART 1

Excluded Territories

Afghanistan Fiji Panama
Algeria Finland Papua New Guinea
Angola France Peru
Argentina Gabon Philippines
Armenia Gambia Poland
Aruba Germany Portugal
Australia Ghana Puerto Rico
Austria Greece Republic of Korea
Azerbaijan Guyana Russia
Bangladesh Honduras Saudi Arabia
Barbados Iceland Senegal
Belarus India Sierra Leone
Belgium Indonesia Slovakia
Belize Iran Slovenia
Benin Israel Solomon Islands
Bolivia Italy South Africa
Botswana Ivory Coast Spain
Brazil Jamaica Sri Lanka
Brunei Japan Swaziland
Burundi Kenya Sweden
Cameroon Lesotho Tanzania
Canada Libya Thailand
China Luxembourg Trinidad and Tobago
Colombia Malawi Tunisia
Croatia Malaysia Turkey
Cuba Malta Uganda
Czech Republic Mexico Ukraine
Democratic Republic of the Congo Monaco United States of America
Denmark Morocco Uruguay
Dominican Republic Namibia Venezuela
Ecuador Netherlands Vietnam
Egypt New Zealand Zambia
El Salvador Nigeria Zimbabwe
Falkland Islands Norway  
Faroe Islands Pakistan  

PART 2

Specified further requirement

If at any time during the accounting period the CFC carries on insurance business in relation to which the CFC is regulated in any territory, none of that business is carried on in Luxembourg at that time.

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations exercise powers conferred by the Taxation (International and Other Provisions) Act 2010 (c. 8) (“TIOPA 2010”) in relation to the excluded territories exemption (“the ETE”) in Chapter 11 of the controlled foreign companies legislation contained in Part 9A of TIOPA 2010.

The ETE exempts a controlled foreign company (“CFC”) resident in a territory where the CFC’s income is taxed at a rate similar to the UK main corporation tax rate. It does so in part by way of a list of territories that would qualify as an ‘excluded territory’ for the purposes of the ETE. Other requirements however also have to be met for the ETE to apply. These requirements can be found in section 371KB(1)(b) to (d) of TIOPA 2010. If the ETE applies for a CFC’s accounting period all of its profits are exempted from the CFC charge.

Regulation 1 provides for citation, commencement and effect, and regulation 2 for interpretation.

Regulation 3 and Part 1 of the Schedule provide a list of excluded territories for the purposes of the ETE.

Regulation 4 modifies the ETE which will apply in specified cases. The regulation provides that the requirements in section 371KB(1)(b) and (c) of TIOPA 2010 do not have to be met provided the CFC is resident in one of the territories specified and its business is not carried on through a foreign permanent establishment at any time during the relevant accounting period.

Regulation 5 and Part 2 of the Schedule provide that the ETE is unavailable in respect of a CFC unless a further requirement is met. This further requirement is that if the CFC carries on insurance business, none of that business is carried on in Luxembourg.

A Tax Information and Impact Note covering this instrument was published on 21 March 2012 alongside the draft CFC rules now contained in Part 9A of TIOPA 2010 and is available on the HMRC website at www.hmrc.gov.uk/thelibrary/tiins.htm. It remains an accurate summary of the impacts that apply to this instrument.

EXPLANATORY MEMORANDUM

1. This explanatory memorandum has been prepared by HM Revenue & Customs (“HMRC”) and is laid before the House of Commons by Command of Her Majesty.

2. Purpose of the instrument

2.1 The Regulations provide a list of excluded territories for the purposes of the excluded territories exemption (“ETE”) and set out a further requirement for the ETE to apply. They also provide a modified ETE exemption which will apply in specified cases provided certain requirements are met.

3. Matters of special interest to the Select Committee on Statutory Instruments

3.1 The Regulations replace the Controlled Foreign Companies (Excluded Companies) Regulations (SI 1998/3081) which are revoked from the date the Regulations take effect.

4. Legislative Context

4.1 Subsections (2) and (3) of section 371KB of Part 9A of the Taxation (International and Other Provisions) Act 2010 (TIOPA) detail the powers used by the Regulations. The powers are being used for the first time in making the Regulations. The powers allow for, the list of excluded territories to be provided, the requirements in subsections (1)(b) and (c) to be disapplied or modified, and specification of further requirements which need to be met in order for the ETE to apply to a controlled foreign company (“CFC”).

4.2 The ETE is an exemption from the CFC provisions in Part 9A of TIOPA (“the CFC legislation”).

4.3 The CFC legislation itself will, in certain circumstances, impose a charge (equivalent to corporation tax) on UK resident companies in respect of overseas companies which are controlled from the UK and in which the UK resident company has a specified interest. There are various exemptions from the CFC legislation including the ETE. The ETE broadly replaces the Excluded Countries Exemption (mainly found in SI 1998/3081) which was part of the previous CFC legislation (mainly found in Chapter IV of Part XVII of ICTA 1988).

5. Territorial Extent and Application

5.1 The Regulations apply to all of the United Kingdom.

6. European Convention on Human Rights

As the Regulations are subject to negative resolution procedure and do not amend primary legislation, no statement is required.

7. Policy background

  • What is being done and why

7.1 The CFC legislation, of which the ETE is part, is anti-avoidance legislation, the aim of which is to prevent the diversion of UK profits to low tax territories. Reform of the CFC legislation is intended to improve the UK’s international tax competitiveness whilst retaining adequate protection for the UK’s corporate tax base.

7.2 Within the CFC legislation the purpose of the ETE is to exempt those CFC’s that pose a low risk to the UK corporate tax base due to their territory of residence. The ETE will broadly exempt CFCs resident in territories where the CFC’s income is taxed at a rate similar to the UK main corporation tax rate.

7.3 If the ETE applies for a CFC’s accounting period all of its profits will be exempted from charge under the CFC legislation.

  • Consolidation

7.4 Not applicable

8. Consultation outcome

8.1 A consultation document was published in June 2011 on proposals for wider reform of the previous CFC legislation and representations on this were extensive. A further consultation on the draft CFC legislation (including the Regulations) took place from 6 December 2011.

8.2 As part of the consultation process HMRC (along with HM Treasury) met with various interested parties including business and their representatives and actively sought their input into the proposals and the draft CFC legislation.

8.3 The outcome of the consultation was that business wanted the ETE to have as many territories as possible on the excluded territories list in the Regulations and to have only a few targeted general conditions. It was considered that this would make the exemption simpler to apply than the previous Excluded Countries Exemption which the ETE replaces. Business also wanted to have included in the ETE a modified exemption comprising a very short list of excluded territories for which fewer conditions would apply. Further information can be found in the Tax Information and Impact Note published on HMRC website.

9. Guidance

9.1 Guidance on the operation of the ETE, of which the Regulations form part, will be included in the wider update of the International Manual concerning the CFC legislation. The Guidance will be published on the HMRC website in due course.

10. Impact

10.1 The impact on business, charities or voluntary bodies is negligible as those businesses already claiming exemption under the Excluded Countries Exemption will in the vast majority of cases still be eligible for the ETE.

10.2 The impact on the public sector is nil.

10.3 A Tax Information and Impact Note covering this instrument was published on 21 March 2012 alongside the draft CFC rules now contained in Part 9A of TIOPA 2010 and is available on the HMRC website at www.hmrc.gov.uk/thelibrary/tiins.htm. It remains an accurate summary of the impacts that apply to this instrument.

11. Regulating small business

11.1 The Regulations apply to small business in the same way as larger business. It will however be larger businesses that have CFCs as part of their group structure which will fall within the CFC legislation. No special approach for small business is therefore necessary.

12. Monitoring & review

12.1 HMRC will keep the Regulations under review to ensure that they meet the policy objectives set out above in section 7.

13. Contact

13.1 Mary Sharp at HMRC Tel: 0207 147 2656 or 0207 147 0797 (email: mary.sharp@hmrc.gsi.gov.uk) can answer any queries regarding the Regulations.


SI, 06/12/2012
Crown Copyright material is reproduced by permission of the Controller of Her Majesty's Stationery Office.