GIM11100 - Captive insurers: controlled foreign companies (CFCs): funded accounting: special tax rules: returns and dividends

Maximum four year funded accounting - section 755B(4A) ICTA88

If the captive’s accounts are signed off later than three years following the end of the underwriting year, the technical provision is deemed to be replaced at the end of the third year following the end of the underwriting year (ICTA88/S755B (4A)). It follows that, for the purposes of the CFC rules, four-year funded accounting is the maximum permitted (as was the case for a UK insurer), and the parent’s CTSA return must be made on this basis.

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Enhancement of dividends - paragraph 2 Schedule 25 ICTA88

The rules in ICTA88/SCH25/PARA2 on acceptable distribution policies were amended where they applied to the amount of the dividend paid by a captive using funded accounting. The dividend must have been paid within 18 months of the date of the replacement of the technical provision, namely the date the accounts are signed off. Dividends paid later than 18 months after the end of the CFC’s accounting period were ‘enhanced’ by an interest factor. Details of the formula are in INTM213090.

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Time limits for enquiries, returns and payment of dividends

Where a CFC uses funded accounting, a number of permutations relating to enquiries, the amendment of returns and the payment of dividends need to be considered.

  • The UK company must submit its return on the basis that the company in which it holds the relevant interest either is, or is not, subject to the CFC rules.
  • However, the circumstances of the CFC may change. In particular the UK company may not be certain whether or not the CFC is subject to a lower level of taxation in its territory of residence. This will be so where the CFC’s fund has not closed when the UK company’s return is filed (as will normally be the case), because if for the underwriting year the captive has made a loss, the corresponding UK tax will be nil - ICTA88/S750 (2). So even if the territory in which the CFC is resident has a zero tax rate, the captive will not be subject to a lower level of tax. (GIM11120).
  • For accounting periods beginning before 1 July 2009, the CFC may have failed to follow an acceptable distribution policy within the time limit (GIM11130). The ADP exemption was repealed by FA09/SCH16 Part 1 for subsequent accounting periods.