FB 2018-19: controlled foreign company rules tweaked for ATAD compliance

Due to the introduction of the EU Anti-Tax Avoidance Directive (ATAD) before Brexit, the government plans to amend the tax rules on controlled foreign companies (CFCs) to ensure ongoing compliance

The draft legislation is set out in Finance Bill 2018-19 and the changes to CFC rules will take effect from 1 January 2019, affecting large corporates operating across EU member states. The timing reflects the 1 January 2019 implementation date for ATAD.

Although the UK already has comprehensive CFC rules which meet or exceed most of the requirements set out by ATAD, there will be two key changes to existing rules set out in Part 9A TIOPA (Taxation (International and Other Provisions) Act) 2010.

These relate to the definition of control and the treatment of certain profits generated by UK activity.

Articles 7 and 8 of ATAD set out detailed rules in relation to CFCs. Article 7 covers the definition of a CFC (by reference to control and an effective rate of tax test) and the types of income which can be subject to a CFC charge. Article 8 covers the computation and attribution of CFC profits.

Definition of control

Article 7(1)(b) of ATAD defines control by reference to whether a taxpayer, either alone or together with its associated enterprises, controls an entity by reference to capital interests, voting rights or entitlement to profits.

The current UK CFC measure of control does not take into account interests held by non-resident associates or related parties. However, ATAD requires all associated enterprises to be taken into account when assessing control.

Accordingly, the UK CFC control rules, which are set out in Chapter 18, Part 9A TIOPA 2010, will be amended so that any interests held by associated enterprises, wherever they’re resident, are taken into account when assessing control.

UK significant people functions

Article 7(2)(b) of ATAD sets out specific rules for identifying CFC profits that have been generated by key activities – significant people functions (SPFs) – carried out by a controlling company in a member state.

The current UK CFC rules are in line with this approach. However, a minor change is required to ensure that the UK CFC rules are fully compliant with the SPF approach set out in ATAD.

This change relates the treatment of non-trade finance profits which have been generated by UK SPFs.

The UK CFC rules in Chapter 5, Part 9A TIOPA 2010 bring non-trade finance profits into scope where any of the SPFs are carried on in the UK.

Profits which fall within Chapter 5 can also be considered under Chapter 9, Part 9A TIOPA 2010, which deals with non-trade finance profits arising from certain related party transactions. Subject to meeting the detailed conditions set out in Chapter 9, some or all of those non-trade finance profits will be exempt.

The Chapter 9 rules are commonly referred to as CFC finance company rules.

In order to comply with ATAD, the government will amend the UK CFC rules so that non-trade finance profits which fall within the scope of Chapter 5 by virtue of UK SPFs will no longer qualify for consideration under the CFC finance company rules in Chapter 9.

The government plans to introduce these changes as part of Finance Bill 2018-19 and they will come into force on 1 January 2019.

The consultation period on Finance Bill 2018-19 closes for comment on 31 August 2018.

HMRC Guidance: Anti-Avoidance Directive about controlled foreign companies and EU Exit 

Report by Sara White

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