LAM12120 - International and cross border: Definition of control and offshore funds held by life insurers: alignment with accounting: standards: Regulation 3 of SI2012/3044

The CFC rules will only apply where life insurance companies have direct or indirect control (as defined by TIOPA10/PART9A/CH18) over an entity including an offshore fund.

However, in tiered corporate structures the ownership interests in funds can be diverse. The multiple holdings can also make it difficult to obtain evidence and documentation to establish whether the life insurance company controls the CFC. Given the range and volume of investments held by life companies, the CFC control provisions are modified to ease the compliance burden.

In order to ensure that the rules apply appropriately to all relevant parts of the fund structure, the concepts of a ‘principal CFC’ and an ‘associated CFC’ are introduced in Regulation 2 of SI2012/3044. This ensures that the regulations continue to apply when the principal CFC is not subject to a CFC charge, but a CFC charge could arise from one of its subsidiary funds.

This modification stipulates that control of the principal or associated CFC will be determined by reference to TIOPA10/371RE. The CFC is a subsidiary of the UK life insurance company – ‘the parent’ – in accordance with the accounting standard FRS102 (previously FRS2 for accounting periods beginning before 1 January 2015). This applies regardless of whether that standard (or any revisions or updates to that standard) is adopted for the statutory accounts of the life insurance company. This means that where the life insurer holds less than a 50% interest in the offshore fund then the CFC rules will not apply to that fund.

It is therefore only likely to be fund investments that are consolidated into the statutory accounts of the life insurance company that will be controlled for the purposes of the CFC rules.

Further exclusions apply in relation to equity funds explained at LAM12130.