Overseas tax - Chapters 14 - 15 - CFCs

Question 1

What is a CFC?

Answer 1

A CFC is a non-UK resident company that is controlled by UK resident persons (Individuals or companies)

Question 2

What are the four tests of control for a CFC?

Answer 2

1. Legal and economic control - where UK persons can secure the affairs of the foreign company, or they have the right to >50% of the income, assets on windup or disposal proceeds.
2. Joint Venture control (40%) – A and B taken together control the company. A is UK resident and holds >40%, and B is non-resident and holds 40-55%.
3. Associated companies test - UK company together with associated enterprises hold >50% investment determined by reference to share capital and voting rights – associated enterprise is 25% direct or indirect holding, or same holder of >25% of both.
4. Accounting standards test - on the assumption that the subsidiary is a CFC, at least 50% of the CFC’s chargeable profits would be apportioned to the parent company taken together with its UK resident subsidiaries.

Question 3

What are the 5 exemptions for CFCs?

Answer 3

1. The exempt period exemption - This applies if immediately before the acquisition it was carrying on a business (i.e. not newly incorporated), and the CFC charge did not apply for at least 12 months prior to the period of acquisition. it also must meet 3 conditions, these are the First condition, Subsequent period condition and Chargeable Company condition.
2. The excluded territories exemption - This applies if it meets the 4 conditions (5 if it is an insurance company) These are the residence condition, Income condition, IP condition, anti-avoidance condition and extra condition.
3. The low profits exemption - This applies if a CFC has taxable total profits of no more than £50,000; or no more than £500,000 (of which no more than £50,000 represents non-trading income). If the CFC has a short accounting period, these thresholds are reduced proportionately.
4. The low profit margin exemption - This applies if the CFC has a profit margin of no more than 10% of its relevant operating expenditure for the relevant accounting period.
5. The tax exemption - This applies when the local tax amount is at least 75% of the corresponding UK tax

Question 4

What are the 3 exempt period exemption conditions?

Answer 4

1. The first condition - The accounting period ends during an exempt period of the CFC
2. Subsequent period condition – There is at least one AP after the exempt period where the CFC rules apply but there is no CFC charge (i.e., it must be trading and controlled by a UK person)
3. Chargeable company condition – the UK company subject to the CFC charge must be the same company (or a connected company).

Question 5

What are the 5 excluded territories exemption conditions?

Answer 5

1. The residence condition - The CFC is resident and carrys on business in an excluded territory. Where the CFC is resident in Australia, Canada, France, Germany, Japan and the USA, no further analysis needs to be undertaken.
2. The income condition - The CFCs total relevant income is no more than 10% of accounting profits or £50k.
3. The IP condition - No IP has been transferred to the CFC from related parties within the last 6 years that had a significant impact.
4. The Anti-Avoidance condition - Not involved in an arrangement were the main purpose is to obtain a tax advantage.
5. The extra condition (Applicable to insurance businesses) - None of the business is to be carried out in Luxembourg.

Question 6

What are the 5 gateways?

Answer 6

1. Profits attributable to UK activities
2. Non-trading finance profits
3. Trading finance profits
4. Captive insurance business - Only consider for insurance companies
5. Solo consideration - Only consider for banking companies

Question 7

What are the four ‘safe habours’ for gateway 1?

Answer 7

1. CFC does not hold any assets or bear risks under an arrangement whose main purpose is to reduce UK tax (motive test)
2. CFC does not have any UK managed assets of bear any UK managed risks
3. The CFC has the capability to be commercially effective if UK managed assets were to stop being UK managed
4. The CFC’s total profits consist only of non-trading finance profits or property business profits (or both).

Question 8

What are the five conditions for trading profits to be excluded from gateway 1?

Answer 8

1. Business premises – physical presence in resident country
2. Income - <20% trading income from UK
3. Management expenses - <20% expenses from management activity in UK
4. Intellectual property – no significant transfers (>10%) in last 6 years
5. Export of goods <20% from goods exported from the UK (disregard exports to CFC country)

Question 9

What are the four categories to pass through gateway 2?

Answer 9

1. Attributable to UK activity
2. Arising from the investment in the CFC of UK monetary or non-monetary assets (does not include funds received for goods or services)
3. Arise from an arrangement as an alternative to the CFC paying dividends
4. Arise from the direct or indirect finance lease of an asset to the UK (where they could have purchased the asset other than for the tax advantage of the finance lease)

Question 10

What is the ‘safe harbour’ for gateway 2?

Answer 10

The CFCs non-trading profits are incidental (no more than 5%) to a trade or property business, or the CFC is a holding company of 51% subsidiaries.