Controlled Foreign Companies: Introduction to the CFC Charge: Particular Entities: Companies carrying on BLAGAB
UK life assurance companies carry on a basic life assurance and general annuity business. (“BLAGAB”) Companies that carry on BLAGAB are subject to different rules of taxation in the UK. So for CFC purposes there are special rules for ascertaining the “appropriate rate” of tax and “creditable tax” on the apportionment of the chargeable profits and creditable tax of a CFC where the relevant interest or part of a relevant interest is held by a UK resident company carrying on BLAGAB. These rules reflect the tax treatment of UK life assurance business.
TIOPA10/S371BH modifies the application of Step 5 of section 371BC(1) (see INTM194400) for companies that carry on BLAGAB. For this to occur the chargeable company must carry on BLAGAB, the life insurance I - E rules apply and certain conditions set out in the section are to be met in relation to a relevant interest or part of a relevant interest that the chargeable company holds in a CFC at all times during the CFC’s accounting period.
The conditions to be met are outlined below. Conditions D and G must both be met and at least one of Conditions E or F must be met for the section to apply.
- Condition D -This condition will be met if the relevant interest or the part of a relevant interest is held by way of a direct or indirect holding by the chargeable company of shares (“the relevant shares”) in the CFC at all times during the CFC’s accounting period.
- Condition E- If no increase or part of any increase in the value of the relevant shares is brought into account at step 1 or 2 of FA12/S73 (for external users: http://www.legislation.gov.uk/ukpga/2012/14/section/73) in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period then the condition will be met.
- Condition F- The condition is met if no dividend or other distribution or part of any dividend or other distribution received by the chargeable company directly or indirectly from the relevant shares is brought into account at step 1 of FA12/S73 in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period.
- Condition G -The condition will be met if assets which represent the relevant interest or the part of a relevant interest are held, during the CFC’s accounting period, to any extent, by the chargeable company for the purposes of its long term business.
Where the relevant conditions and other requirements are met, the CFC charge at step 5 of section 371BC(1) (see INTM194400) is adjusted to exclude any amounts that relate to a chargeable company carrying on BLAGAB as a shareholder but to leave in the CFC charge amounts representing the policyholders’ share of the “BLAGAB component” of the chargeable profits i.e. the “apportioned profit” is the profit that has not been brought into account in determining whether the chargeable company has an I-E profit for corporation tax purposes.
TIOPA10/S371BH achieves this by treating the BLAGAB component of P% and Q% at step 5 of section 371BC(1) as being reduced until the BLAGAB component of P% (and Q% proportional to this amount) represents only the policyholders’ share of the BLAGAB component of the apportioned profit. This component of P% is referred to at TIOPA10/S371BH(2) as an additional sum.
TIOPA10/S371BH(11) sets out the steps required to determine the BLAGAB component of the apportioned profit. These steps are:
- First assume that the apportioned profit is income paid to the chargeable company at the end of the CFC’s accounting period that is brought into account for the purpose of computing its life insurance profits; and
- On the basis of that assumption, determine how much of the apportioned profit would be referable to the chargeable company’s BLAGAB business. That amount is the “BLAGAB component” of the apportioned profit.
TIOPA10/S371BH(10) provides that the “apportioned profit” for these purposes means so much of P% as is attributable to the chargeable company having the relevant interest or part of a relevant interest during the CFC’s accounting period.
TIOPA10/S371BH(12) provides that the “policyholders’ share” of the BLAGAB component is equal to the policyholders’ share of the I-E profit for the relevant corporation tax accounting period as determined by Chapter 5 of Part 2 of FA 2012.
The “appropriate rate” of tax to be charged at Step 5 of section 371BC(1) is also modified to the policyholders’ rate of tax under section 102 of FA 2012, or an average rate where there is more than one such rate over the relevant corporation tax period.
The mechanism in section 371BH is complex because it has to allow for any “apportioned profit” for a life company first to be allocated (in the same way as any other profits of a life company) between BLAGAB and non-BLAGAB businesses. Then it is necessary to distinguish between the policyholder and shareholder elements of the BLAGAB component before arriving at the CFC charge. But the principle can be illustrated by a simple example:
A life insurance company carries on BLAGAB and non-BLAGAB life business. All assets support both businesses and are allocated 40% to BLAGAB and 60% to non-BLAGAB. It has a CFC which is 100% held as one of the assets of its long term business. The CFC has chargeable profits of 100 for the accounting period. The value of the shares in the CFC are not brought into account in section 73 FA 2012 in arriving at the I-E profit of the life company.
TIOPA10/S371BH applies in respect of the BLAGAB business (section 371BG applies in respect of the non-BLAGAB business). When charging the CFC charge under step 5 of TIOPA10/S371BC(1), P% is reduced to the policyholder’s share of the BLAGAB component of the “apportioned profit”. In this case the BLAGAB component of the apportioned profit will be 40% of 100, i.e. 40. If we assume that the result of the calculation of the Policyholders share of the BLAGAB component of the apportioned profit is that only half of the apportioned profit will be charged at the policyholders’ rate, then the P% percentage will be reduced to 20%. And if we assume that the policyholder’s rate is 20% for the period the result of the TIOPA10/S371BH calculation will be a charge of 4, less 20% of any of the CFC’s creditable tax.