CFC finance company exemption changes to prevent profit shifting

CFC finance company exemption changes to prevent profit shifting

Tue 01 Apr 2014

Two changes to the CFC rules in the Finance Bill 2014 will prevent profit shifting to exploit the finance company exemption.

If a UK company currently has an existing loan to a non-UK group company the temptation is to transfer that loan to a new low-taxed offshore subsidiary in exchange for the issue of shares in that subsidiary. The effect would be to transfer the profits on the intra-group lending into the low-taxed jurisdiction. If the CFC finance company exemption applied, the UK company would no longer have a tax cost related to that financing. Hence, the overall tax cost to the group would be reduced.

The first amendment to the CFC rules is designed to stop groups from transferring to a non-UK company the UK profits arising from existing intra-group lending. This is achieved by preventing the transferred loans from being ‘qualifying loan relationships’ for the finance company exemptions where three conditions are met:

  • there is a loan made by a UK resident company to a connected non-UK resident company;
  • an ‘arrangement’ is made directly or indirectly in connection with this loan; and
  • the main purpose, or one of the main purposes, of the arrangement is to achieve a reduction in UK credits (i.e. income) or an increase in UK debits (i.e. expenses) of the UK connected company compared to what they would otherwise have been.

The test will be applied on a loan by loan basis.

The change was announced at the Autumn Statement and has effect from 5 December 2013. It affects any company that transfers UK receivables into an offshore finance company.  Companies which transferred UK receivables into an offshore finance company before 5 December 2013 are not affected by the rule change. 

The second change strengthens an existing anti-avoidance provision to prevent an offshore CFC benefiting from the partial or full finance company exemption where UK debt replaces third party debt of a non-UK group company via the CFC as part of an arrangement to gain a tax advantage for any person. 

Companies which have entered into such an arrangement will be affected from 5 December 2013, even if the arrangement was entered into prior to that date.  If this is part way through an accounting period the period is split and profits apportioned between the two periods.

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