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Foreign profits taxation

The measure

Today's announcement covers each of the areas of the foreign profits package and finally provides some certainty over commencement dates:

  • Dividend exemption will apply to qualifying dividends received on or after 1 July 2009. The original proposals suggested the exemption would only apply to medium and large enterprises but has now been extended to all companies.
  • The worldwide debt cap will apply to large groups for accounting periods beginning on or after 1 January 2010 and will restrict UK tax deductions for interest payable by UK members of a group by reference to the gross consolidated finance expense of the group. The proposal to extend the unallowable purpose anti-avoidance rule that applies to loan relationships and derivative contracts ('para 13') has been dropped from the package but will be kept under review.
  • The removal of some of the exemptions from the current Controlled Foreign Company (CFC) regime will apply for accounting periods beginning on or after 1 July 2009. The Acceptable Distribution Policy (ADP) exemption will be abolished. The exemptions for superior and non-local holding companies will also be removed (subject to grandfathering for two years for existing holding companies). The exemption for local holding companies will remain.
  • The current Treasury Consent rules are being repealed and a new reporting requirement will apply to transactions with a value in excess of £100m undertaken on or after 1 July 2009. Relevant transactions must be reported within 6 months subject to certain exclusions. These include several based on the existing 'General Consents' rules and an exclusion for trading transactions.

Separate reform of the current CFC regime will continue on its own timetable as announced at the November Pre-Budget Report.

Who will be affected?

  • The introduction of dividend exemption will affect all groups regardless of size with shareholdings owned by a UK company. The proposed reform includes the abolition of the current exemption for UK-UK dividends, which will affect wholly domestic groups as well as those with overseas investments.
  • The debt cap will affect all large groups with one or more UK group companies. Even wholly domestic groups will need to apply the debt cap rules even though these may not result in any cash tax effect. UK outbound groups with upstream loans and inbound groups whose UK net finance expense exceeds their group external finance expense can expect to suffer additional tax under the measure.
  • UK outbound groups with CFCs will be impacted by the removal of some of the holding company exemptions and the ADP exemption.
  • The removal of the Treasury Consents regime will also impact UK outbound groups.

When?

Each separate piece of the reform package applies as outlined above. Updated legislation for these reforms is expected in Finance Bill 2009, to be published on 30 April.

 

Our view

Today's Budget announcement is the latest development in more than two years of discussion and consultation on this topic and finally gives some certainty as to the commencement date of these provisions (although until an updated draft of the legislation is available, it is difficult to comment on the benefits of the package as a whole).

We welcome the extension of the dividend exemption to small and medium sized businesses, the removal of the extended unallowable purpose provisions and the delay of the introduction of the worldwide debt cap. This will give groups more time to consider the potential impact of these wide ranging provisions. However, whether the package can be said to 'enhance the UK's competitive position as a location for multinational business', or 'provide greater certainty and stability to the tax treatment of foreign profits' is debateable.