As previously announced in July 2018, two amendments will be made to the UK’s controlled foreign company (CFC) rules with the intention of bringing them into line with Council Directive (EU) 2016/1164, also referred to as the Anti-Tax Avoidance Directive (ATAD).
First, the definition of control will be broadened so that the interests of non-resident associates are taken into account when considering whether a foreign company is a CFC.
Second, the Chapter 9 finance company rules will be amended so that the full or partial exemption will not be available in respect of profits attributable to UK significant people functions (SPFs).
It is expected that the first measure will affect corporate taxpayers where UK persons do not themselves have sufficient rights in a foreign company for it to be regarded as a CFC, but will be regarded as doing so when the rights of associated entities are taken into account. For example if a foreign company is 20% owned by a UK resident company, and 80% owned by the UK resident company's non-UK parent, it is expected that the foreign company will become a CFC under the new rules.
The second measure will affect taxpayers relying on the Chapter 9 full or partial exemption in respect of non-trade finance profits arising in CFCs. To the extent a CFC’s non-trade finance profits are attributable to UK SPFs, it is likely they will in future be subject to a full CFC charge, unless the CFC qualifies for an entity level exemption.
The changes will take effect from 1 January 2019.
We look forward to seeing the draft legislation setting out the detail of these changes.
The change to the definition of control will bring some additional foreign companies within the scope of the UK CFC rules. The impact will likely be greatest for non-UK parented groups and a number of these will face new compliance obligations.
The change with respect to Chapter 9 will be relevant for the many taxpayers who rely on the finance company full or partial exemption. Although HMRC have referred to the change as “minor” it will require those taxpayers to undertake a detailed factual analysis that was simply not needed previously. This comes alongside the current uncertainty in relation to the Chapter 9 regime that has been caused by the European Commission’s State Aid challenge.