CFC and foreign branch reform
The measure
The Budget announcements confirm the Government's intention to reform the UK controlled foreign companies ('CFC') regime. This regime potentially imposes additional UK tax in relation to the profits of low-taxed foreign subsidiaries. This is a continuation of the long-running consultation undertaken by the previous Government, the most recent instalment of which was the release of a detailed discussion document by HM Treasury in January 2010 and subsequent collation of responses.
The Budget also confirms the intention to move towards a more territorial basis for taxing the profits of foreign branches of UK companies. Again this had been previously announced. It is stated that there will be consultation this summer on options for reform, including scope for a branch exemption and the possibility of retaining foreign branch loss relief as part of a revised basis.
The Budget announcements do not include further detail as to what reforms will be made.
Who will be affected?
All corporate groups that have foreign subsidiaries owned from the UK, or operate through branches in non-UK territories.
When?
It had been previously announced that the Government's aim was to legislate on CFC reform in 2011. Today's Budget indicates that whilst interim improvements will be legislated in spring 2011, wider reform is delayed until 2012.
There is no detail on precise effective dates or transitional measures. In particular there is no indication as to whether the delay to reform will mean that the current transitional reliefs in relation to certain non-UK holding companies will continue until the implementation of the eventual reform.
HM Treasury will establish two working groups of representatives from business to discuss the interim improvements to the CFC regime and the taxation of foreign branches. Nominations for these working groups need to be made by Tuesday 6th July to HM Treasury.
The stated intention in relation to branch profits is for legislation to be introduced in 2011. Again there is no detail on precise effective dates.
We welcome the continued commitment to reform the CFC and branch profit rules to deal with today's multinational businesses and enhance the UK's competitiveness. The success of this will of course depend on the design of the updated regime, and details of this are still awaited.
It is disappointing that full CFC reform appears to have been further delayed but we hope that the additional time will be used to ensure that the resulting regime is well designed and carefully targeted.
