Part 4 of 4
This is the Finance Act 2015 version of this article. It is relevant for candidates sitting the P6 (UK) exam in the period 1 September 2016 to 31 March 2017. Candidates sitting P6 (UK) after 31 March 2017 should refer to the Finance Act 2016 version of this article (to be published on the ACCA website in 2017).
So far in this article Global Figurines Ltd (GFL) has begun trading, acquired an additional business in the UK and started a new manufacturing business overseas. In this part we consider the implications if the rate of corporation tax in Marineland was only 8%, such that the corporation tax liability in Marineland could be less than three quarters of the equivalent UK liability. It would then be necessary to consider the application of the CFC rules.
The CFC regime
As has already been noted, a CFC is a non-UK resident company that is controlled by UK resident companies and/or individuals. The CFC regime imposes a UK corporation tax liability, a ‘CFC charge’, on the corporate owners of a CFC where UK profits have been artificially diverted from the UK.
In determining whether or not there will be a CFC charge there are two matters to consider:
- for there to be a CFC charge the CFC must have ‘chargeable profits’, and
- there will not be a CFC charge if one or more of the exemptions is available to the CFC.
Chargeable profits are those income profits (not chargeable gains) of the CFC, calculated using UK tax rules, which have been artificially diverted from the UK.
Even though a CFC may have chargeable profits, there is no CFC charge if one of the following exemptions applies.
- Exempt period exemption – This 12-month exemption from the CFC rules can apply where a non-UK resident company is acquired by UK resident persons, such that it becomes a CFC. For this exemption to be available the company must continue to be a CFC for the accounting period following the exempt period but not be subject to a CFC charge for that period.
- Tax exemption – As has already been noted, the tax exemption applies where the local tax paid by the CFC is at least 75% of the amount of tax the CFC would have paid in the UK if it were UK resident.
- Excluded territories exemption – This exemption applies where the CFC is resident in one of the territories specified as being excluded, and certain conditions relating to its tax treatment in that territory are satisfied. This removes the need to prepare the detailed calculations necessary in respect of the tax exemption where the CFC is located in a tax regime with similar tax rates to the UK.
- Low profits exemption – This exemption applies where the CFC’s profits do not exceed £500,000 and its non-trading income does not exceed £50,000.
- Low profit margin exemption – This exemption applies where the CFC’s accounting profits are no more than 10% of its expenditure.
The CFC charge
If none of the exemptions is available, a CFC charge will be levied on UK resident companies (not individuals) entitled to at least 25% of the CFC’s profits. The charge is calculated as follows:
- UK corporation tax at 20% on the proportion of the CFC’s chargeable profits (the profits artificially diverted from the UK) to which the UK resident company is entitled
- less a deduction for an equivalent proportion of any creditable tax.
Creditable tax consists of:
- any double tax relief that would be available to the CFC if it were UK resident
- any income tax suffered by the CFC on its income, and
- any UK corporation tax on the income of the CFC that is taxable in the UK.
Applying the rules to an overseas subsidiary of GFL
If none of the exemptions is available, the CFC charge will be levied on the company’s chargeable profits, ie those profits which have been artificially diverted from the UK. If the chargeable profits are assumed to be £80,000, the CFC charge levied on GFL will be calculated as follows.