Controlled Foreign Companies – ‘at a loss regarding relief’/’bring it onshore’

Controlled Foreign Companies – ‘at a loss regarding relief’/’bring it onshore’

Wed 08 Jul 2015

Under the Controlled Foreign Company (‘CFC’) legislation, UK-resident holding companies of a large group will face a CFC charge on profits of certain foreign subsidiaries.  Previously, UK holding companies could offset UK losses/excess expenses to ‘reduce’ the profits of the relevant foreign when calculating the CFC charge.

From 8 July 2015 UK losses/surplus expenses will not be offset when calculating a CFC charge.

Given the ever-increasing international scrutiny (including the current BEPS project) facing the taxation of profits involving cross-border structures, this amendment to the CFC legislation could be seen as a relatively punitive addition to the UK’s legislative armoury, which includes at present:

  • Transfer Pricing;
  • CFC; and
  • Diverted Profits Tax.

Under the previous CFC legislation, if a loss (or surplus expenses) arose in the UK Holding Company (or another UK company that was a member of the same loss group) it could be used to ‘reduce’ the profits of the foreign subsidiary when calculating the CFC charge.  In essence, the CFC legislation used to put the CFC charge on the same footing as the UK corporation tax that would be payable if all the group companies were UK tax-resident/treated as UK tax-resident.

However, removing the ability to offset the available UK group losses/surplus expenses when calculating the CFC could be seen as a further punishing measure for groups seen to be taking advantage of offshore structures.  The amendment effectively treats the profits of the foreign subsidiary as being chargeable to UK corporation tax, but then reverts to treating the profits as arising in a foreign entity so not eligible for offsetting group losses, i.e. the ‘worst’ of both worlds.

For further information please contact David Prestwich at david.prestwich@mazars.co.uk

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