The Government is aiming to ease the potential tax charges on the overseas subsidiaries of UK companies by modifying the ‘Controlled Foreign Company’ (CFC) legislation.
A CFC is a foreign company which is controlled by UK residents and which pays 75 per cent or less tax in its country of domicile than it would if it was a UK company. The CFC legislation has been around in different forms for many years and was enacted in order to prevent the artificial transfer of profits from the UK to low-tax jurisdictions.
The new approach is generally to exclude from UK tax the profits of foreign subsidiaries unless they meet criteria set out in a ‘gateway’, which, in essence, will seek to look for the splitting of activities between the UK and foreign businesses which has the effect of ‘exporting’ profits. The aim is to exclude from UK tax the general commercial profits earned locally by the foreign subsidiary.
If a business is able to show that its UK profits are entirely taxed within the UK, then there will be no need to look at the business activities of foreign subsidiaries.
Draft legislation to implement the new regime is expected early in 2012.