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The long awaited foreign profits consultation document has been deferred
and is now promised before summer. In the meantime a number of targeted anti-avoidance measures have been introduced. These target companies which have
sought to retain income offshore by falling within CFC exemptions, so that
the income concerned is not subject to UK tax. Examples
of structures which may be caught include:
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Exempt activities
holding company structures which rely upon income not being recognised
for accounting purposes e.g. by using partnerships;
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Decontrolled structures
e.g. by using trusts;
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Planning which seeks to
reclassify income using discretionary trusts; and
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Planning which aims to
allow companies to satisfy an acceptable distribution policy by
excluding certain income from the ‘chargeable profits’ calculation.
The definition of control for CFC purposes has been considerably widened
and may inadvertently catch commercial structures where shareholders have
significant rights to income or capital but without actual control. The
motive test may be available for arrangements which exist for ‘wholly
commercial purposes’.
The legislation is effective for income accruing post 12 March 2008.
Interestingly in paragraph 11 of the Budget Note the changes to the
definition of gross income of a holding company are said to “put beyond
doubt that gross income of a CFC includes any income to which it is
entitled”. This would suggest that HMRC are leaving open the possibility to
challenge Exempt Activities holding company structures under existing law
despite the comments in HMRC’s International Tax Manual that gross income should
be taken as the amounts received or receivable “as shown in the accounts for
the accounting period in question”.
Companies that may be affected are advised to review their international
structures as a matter of urgency with a view to putting in place
alternative arrangements if appropriate.
Our view
Overall, we welcome the deferral of the consultation on Foreign Profits,
as we think it means that the Treasury is working hard on dealing with a
wide range of issues in a complex area. It is important that the
UK has a competitive regime for the taxation of international
activities, so as not to deter UK-headquartered groups.
Unfortunately, there must now be some doubt as to whether the
legislation will be ready for April 2009.
Some of the anti-avoidance changes are understandable. Others -
particularly the partnership changes - are unwelcome, not least because
such structures may well qualify for exemption under the proposed new
Foreign Profits rules. |
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