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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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Controlled Foreign Companies carrying on general insurance business: Non-annual accounting: implications for controlled foreign companies

Under United Kingdom tax law companies using funded accounting pay tax on an estimated underwriting profit at the end of the year in which the risk was written. When the underwriting year is finally closed and a profit struck, adjustments are made for the tax due. The delay in striking profits for an underwriting year can cause problems for controlled foreign companies, particularly in the following areas:

Lower level of taxation test

To fall within the definition of a controlled foreign company an overseas company must be subject to a lower level of taxation (INTM254380). It may be unclear, when a UK company makes a return, whether an overseas company in which the UK company has an interest and which carries on insurance business on a funded basis, is subject to a lower level of taxation and is therefore a controlled foreign company.

Acceptable distribution policy

The ADP exemption was repealed by FA09/SCH16 Part 1 for accounting periods beginning on or after 1 July 2009.

A controlled foreign company pursues an acceptable distribution policy, and is therefore exempt from Chapter IV tax, if it pays a distribution equalling 90% or more of its chargeable profits to the United Kingdom within 18 months of the end of the accounting period. Where a controlled foreign company carries on general insurance business on a funded basis in which the fund is not closed until at least one year after the end of the underwriting year, it will not necessarily be able to ascertain the chargeable profits at the 18 month point. It would not therefore, in normal circumstances, be able to pursue an acceptable distribution policy.