Controlled Foreign Companies and EU Anti-Tax Avoidance Directive
Published 7 November 2018
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Who is likely to be affected
Large multinational groups with one or more UK tax resident companies.
General description of the measure
This measure introduces 2 changes to the UK Controlled Foreign Company (CFC) regime.
The first change expands the scope of the control rules, which determine whether or not a non-UK resident entity falls within the UK CFC regime.
The second change restricts the scope of the full and partial exemption rules for finance profits, so that these exemptions are not available to the extent that key activities which generate such profits have been carried out in the UK.
Policy objective
The policy objective of this measure is to make sure the UK CFC rules continue to discourage potential tax planning by large multinational groups. The changes will comply with Council Directive (EU) 2016/1164, also known as the EU Anti-Tax Avoidance Directive (ATAD).
Background to the measure
This measure was announced at Budget 2018.
On 23 June 2016, the EU referendum took place and the people of the UK voted to leave the EU. Until exit negotiations are concluded, the UK remains a full member of the EU and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. The outcome of these negotiations will determine what arrangements apply in relation to EU legislation in future once the UK has left the EU.
The UK has comprehensive CFC rules which are set out in part 9A Taxation (International and Other Provisions) Act (TIOPA) 2010.
Two specific changes are being made to the UK CFC rules which will improve the protection they provide. These changes relate to the definition of control, and the treatment of certain profits generated by UK activity. These changes will make sure that the UK CFC rules comply with Council Directive (EU) 2016/1164, ATAD.
The Directive comes into force with effect from 1 January 2019 and sets out minimum standards across a range of anti-avoidance measures which apply to corporates within member states.
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.
Detailed proposal
Operative date
The measure will have effect from 1 January 2019.
Current law
The UK CFC regime is contained in part 9A TIOPA 2010.
The detailed rules which determine control for the purposes of the CFC regime are set out in chapter 18 of part 9A.
The detailed rules which deal with non-trade finance profits are set out in chapters 5 and 9 of part 9A.
Proposed revisions
Definition of control
The current UK CFC measure of control takes into account interests held by UK resident associates or related parties of a chargeable company. 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 are resident, are taken into account when assessing control.
New section 371RG will be inserted into chapter 18. This section will provide that a non-resident company will be a CFC where a UK company, either alone or together with its associated enterprises, holds more than a 50% investment in a non-resident company. This section will also provide a definition of an associated enterprise (by reference to a 25% investment test) and the relevant definitions of 50% investment and 25% investment.
This change will have effect for CFC accounting periods beginning on or after 1 January 2019, with suitable transitional provisions to deal with accounting periods which begin before but end after that date.
This change will make sure all associated enterprises are taken into account when assessing control. This is in line with Article 7(1)(b) of ATAD which 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.
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 use SPFs to determine whether there has been diversion of UK profits. However, a change is required to make sure that the UK CFC rules are fully compliant with the SPF approach set out in ATAD.
This change relate to the treatment of non-trade finance profits and the extent to which they have been generated by UK SPFs.
The UK CFC rules in chapter 5, part 9A TIOPA 2010 bring non-trade finance profits into scope if any of the SPFs are carried on in the UK by virtue of section 371EB.
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 may be exempted from a CFC charge.
The chapter 9 rules in section s371IA will be amended to make sure that to the extent that profits fall within chapter 5 by virtue of UK SPFs under section 371EB, the proportionate part of the profits cannot be considered for exemption under chapter 9. So the profits eligible to be considered by the rest of chapter 9 will now be limited to those which fall only within section 371EC (UK connected capital).
This change will have effect for CFC accounting periods beginning on or after 1 January 2019, with suitable transitional provisions to deal with accounting periods which begin before but end after that date.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| Neg | Neg | Neg | Neg | Neg | Neg |
This measure is expected to have negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects incorporated businesses. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated there will be any impacts for groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to impact on large multinational groups, with one or more UK tax resident companies, through introducing 2 changes to the UK CFC regime. One-off costs included familiarisation with these changes. It is not expected that there will be any on-going costs. There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
This measure is expected to have negligible operational impact.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through regular communication with affected groups.
Further advice
If you have any questions about this change, please contact either:
- Mark Bryan by email: mark.bryan@hmrc.gsi.gov.uk
- Michael Paterson by email: michael.paterson@hmrc.gsi.gov.uk