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Controlled foreign companies update: Treasury invites comments by 10 February

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HM Treasury has published an update and more draft legislation dealing with reform of the controlled foreign companies (CFC) rules. Two circumstances have been identified in which a full, rather than partial, finance company exemption will be offered.

The stated aim of the CFC reform is to move towards a more territorial corporate tax system while targeting ‘artificially diverted UK profits’. The reform is driven partly by a desire to increase the attractiveness of the UK as a ‘tax friendly location for international groups’, Mazars said in a recent briefing.

'We understand that [HMRC] does not plan to allow the exemption to apply for pure finance branches'

Martin Lambert, Grant Thornton

Critics have warned that the reform will remove a deterrent to multinational companies seeking to shift profits into tax havens and could result in substantial revenue losses for developing countries.

This week’s update covers initial feedback received by the Treasury on the proposals and draft legislation published on 6 December. It sets out further proposals on the finance company rules; the application of the CFC rules to exempt foreign branches; and the ‘temporary period of exemption’.

The Treasury said it was considering developing the ‘gateway’ to provide ‘clear entry conditions which work on a qualitative basis and allow groups to be able to assess, in a straightforward manner, that a foreign subsidiary is outside the scope of the rules’.

‘Great news’

Martin Lambert, Head of International Tax at Grant Thornton, said: ‘The changes are very helpful and we have been pushing for them for some time. I am pleased to see that the government has acknowledged the concerns about the compliance burden the new CFC rules would have placed on taxpayers. The new legislation is great news for overseas companies looking at moving into the UK and I am really pleased the issues we raised in consultation have been properly considered.’

Lambert told Tax Journal today: ‘Whilst it was initially unclear whether pure foreign finance branches of UK companies would be allowed to qualify for full or partial finance exemption, having spoken to the HMRC team we now understand their current view is whilst they will allow the exemption to apply where a branch has incidental finance income they do not plan to allow the exemption to apply for pure finance branches. We are concerned this will present issues for groups with pure finance branches and would ask HMRC to consider this point again.’ 


The ICAEW Tax Faculty said in December that it did not believe that the current drafting of the legislation would achieve the objective of a ‘Cadbury-based “gateway” exemption to eliminate the majority of UK controlled foreign subsidiaries from the new CFC regime’. It was ‘almost certain to result in undue bureaucracy and significantly increased compliance costs, unless modified,’ it argued.

The CIOT said the draft legislation was ‘dense, illogical in its order and, consequently, very difficult to follow’.

Engagement with interested parties since December ‘continues to be very helpful’, the Treasury said this week.

It invited comments on the 31 January update by 10 February – the closing date for comments on other draft Finance Bill clauses published on 6 December – or ‘as soon as possible after that date’.