Comment: Complexity on top of mumbo jumbo. The revised CFC rules published on Tuesday risk becoming a compliance nightmare / Macfarlanes

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Comment: Complexity on top of mumbo jumbo. The revised CFC rules published on Tuesday risk becoming a compliance nightmare

As promised, the Government published a revised draft of the Controlled Foreign Company rules on Tuesday (31 January) - click here to read. The new draft contains details of how the new CFC rules will interact with the exemption for foreign branch profits and the regime which will limit the CFC charge on profits of offshore group finance companies.

The main points from the new draft are as follows.

In addition to the proposals to provide a partial exemption for offshore finance companies(under which only 25 per cent of their profits on intra-group financing transactions fall within the CFC regime), the new rules provide for a complete exemption in two circumstances: first, to the extent that the total CFC charge (after applying the partial exemption) would otherwise exceed the net borrowing costs of the UK group members; and second, in some limited cases where loans are made without reliance on group funds.
There will be changes to the foreign branch exemption provisions which, in broad terms, are designed to align the scope of the foreign branch exemption with the CFC rules.
The temporary exemption for foreign companies that are brought within the CFC rules because they are acquired by a UK group or the holding company of the group migrates to the UK will, subject to certain exceptions, be limited to 12 months under the new regime. Also, if at the end of the exemption period, the company remains within the scope of the CFC charging rules, the temporary exemption will not apply.
The new regime will take effect for accounting periods of CFCs beginning after 1 January 2013 - later than previously expected.

The summary document that was published alongside the revised draft legislation acknowledges the concerns that have already been expressed that the new regime could present compliance difficulties for many companies. The main focus of those criticisms has been the Gateway test which, whilst intended to filter out companies that are not intended to be caught by the new rules, is framed in OECD style conceptual drafting and virtually impenetrable.

The Government has undertaken to look again at the Gateway test and seek to recast it in a manner which allows companies to determine quickly and accurately whether their overseas controlled companies are within the scope of the rules. In the meantime, the new finance company rules - while welcome in some respects - will add further complexity to draft legislation which is already far from straightforward.

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02 February 2012
Author: Ashley Greenbank

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Comment: Complexity on top of mumbo jumbo. The revised CFC rules published on Tuesday risk becoming a compliance nightmare

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