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International Manual

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Controlled Foreign Companies: exemptions - Exempt Activities Test: Repeal of exemptions for superior and non-local holding companies: commencement and treatment of straddling periods

FA09/SCH16/PARAS 12 to 15

SCH16/PARA12 states that the changes in Part 2 of the Schedule have effect for the accounting period of a CFC beginning on or after the commencement date. For ‘qualifying holding companies’ the commencement date is 1 July 2011; for all other companies the commencement date is 1 July 2009.

Meaning of ‘qualifying holding company’

Paragraph 13 defines a ‘qualifying holding company’ as a CFC that was an ‘exempt holding company’ for the duration of the last accounting period to end before 1 July 2009 but specifically excluding an accounting period created by Part 2 of this Schedule.

An ‘exempt holding company’ is a company which throughout a particular accounting period was engaged in exempt activities under the special rules applying to non-local and superior holding companies.

The distinction between qualifying and non-qualifying holding companies is fundamental to the operation of the Schedule. It underlies the mechanism by which transitional relief is provided elsewhere in the Schedule.

Periods straddling 01 July 2009

FA09/SCH16/PARA14 contains rules that apply where a CFC has an accounting period that straddles 1 July 2009. In such circumstances the straddling period shall be treated as split into two deemed accounting periods to facilitate the repeal of the superior and non-local holding company rules. This applies both to qualifying and non-qualifying holding companies.

The first deemed period will begin on the first day of the straddling period and end on 30 June 2009; the second will begin on 1 July 2009 and end on the last day of the straddling period. The CFC’s gross income, chargeable profits and creditable tax should be apportioned between the two periods on a time basis according to their respective lengths.

Periods straddling 01 July 2011

FA09/SCH16/PARA15 contains similar rules but which only apply to a qualifying holding company that has an accounting period which straddles 1 July 2011.

The straddling accounting period is again to be treated as split into two deemed accounting periods. The first will begin on the first day of the straddling period and end on 30 June 2011; the second will begin on 1 July 2011 and end on the last day of the straddling period. The CFC’s gross income, chargeable profits and creditable tax should be apportioned between the two periods on a time basis according to their respective length.

The rules in paragraphs 14 and 15 are required to ensure that profits accruing in periods straddling 1 July 2009 and 1 July 2011 are treated appropriately. For CFCs which are not qualifying holding companies 1 July 2009 marks the point from which only the local holding company exemption will be available but for qualifying holding companies that date marks the beginning of a two year transitional period during which the operation of the superior and non-local holding companies is modified by special rules in FA09/SCH16/PARA17.