Ch 22: Overseas aspects: companies Flashcards
When does transfer pricing apply?
Where large companies are connected (control >50%) and
they enter into transactions not at arms length - applies to loans as well with interest rates not at the market rate
What is a CFC?
A CFC is a:
- non resident company
- controlled by (>50%) UK resident companies and/or individuals (shareholders)
When does a CFC charge arise?
If:
The CFC has chargeable profits, AND
The CFC is NOT covered by the relevant exemptions
*only applies to shareholders who are companies and own at least 25%
How do you check if there are chargeable profits?
- The CFC does not hold any assets or bear any risks under arrangements intended to reduce UK tax
- The CFC does not hold any assets of bear any risks managed in the UK
- The CFC would be able to continue if the UK management ceased
If none = no charge
If yes = check for exemptions
What are the CFC exemptions?
- Exempt period exemption; purchased in the past 12mths
- Tax exemption; local tax paid is at least 75% of the amount of tax the CFC would have paid in the UK if it were UK resident
- Excluded territories
- Low profits exemption; CFCs profits do not exceed £500k AND its non-trading income does not exceed £50k
- Low profit margin exemption; the CFCs accounting profits are no more than 10% of expenditure (profits/expenditure x 100)
How do you calculate the CFC charge?
CFC chargeable profits x shareholding % x
Less: foreign tax x relevant % x % owned (x)
In line with transfer pricing - what is required of companies which have a UK tax advantage?
The company which gains the UK tax advantage is required to adjust its CT self assessment by restating the profits based on arm’s length transactions
*(this also includes loans with interest rates not at the market rate)
What does thin capitalisation rectify?
To stop companies shifting profits using excessive amounts of intra-group debt
i.e. it stops them trying to get large tax deductible interest expense - borrowing too much
What happens if is is determined that more has been lent to a company that it could have borrowed from an independent 3rd party?
The interest on the ‘excessive’ part of the loan is disallowed for CT purposes
When do you need to calculate the CFC charge?
If the overseas company is controlled by UK shareholders with chargeable profits and NO exemptions
What is the creditable tax made up of for the CFC charge?
Foreign tax suffered
x Chargeable profits %
x Parent Co %
What happens if you make an election to exempt all overseas branches from UK tax?
It is irrevocable and all current and future overseas branches will be exempt from UK tax
If you have an overseas subsidiary what is the only tax implication?
Extra 51% company which will further reduce the £1.5m limit
What are the rules with foreign income in a UK company?
Include gross of all taxes except dividends which are exempt
Claim DTR
