The rules have been due for an overhaul following the Cadbury Schweppes case where the ECJ held that such rules must be limited to ‘wholly artificial arrangements’.
The Government has included in the proposals options for a partial exemption for offshore finance companies. In most cases, the profits these companies derive from overseas intra-group financing will be taxed at one quarter of the main UK corporation tax rate (5.75% by 2014). Therefore, if the finance company is resident and managed in a low tax territory, there are genuine savings to be made. However, the proposals are not fully developed yet, and conditions and targeted anti-avoidance are likely to feature.
Among the other key changes are:
- A proportionate approach so that only those profits artificially diverted from the UK will be caught, instead of the current all or nothing approach. Examples are the transfer of intellectual property or money on deposit from the UK to an offshore company.
- A general overhaul of the various exemptions, including a new general purpose exemption aimed at exempting profits which have not been diverted from the UK. This is a positive move forwards from the current motive test, which has been extremely difficult for companies to meet. The exempt activities test, excluded countries and de minimis exemptions will survive in a highly modified form, and the new temporary exemption of up to three years following an acquisition or reorganisation will also feature, but again with some changes.
- Intellectual property held overseas may be exempt from the CFC rules in limited circumstances, such as where it has been developed overseas or is genuinely related to a foreign manufacturing trade. The CFC rules will focus on those areas where there is a high risk of profits being diverted from the UK, such as transferring IP out of the UK, and are likely to look back at transfers in the last six years.
Any UK group which has overseas subsidiaries or associates should take note of these proposals as they will have a major impact on the international tax efficiency of the group. Representations can be made until 22 September 2011.