Finance Bill: CFCs – changes to comply with the EU ATAD - KPMG United Kingdom
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Finance Bill: CFCs – changes to comply with the EU ATAD

Finance Bill: CFCs – changes to comply with the EU ATAD

Finance Bill 2018-19 includes two specific changes to the UK CFC rules to ensure they are fully compliant with the EU ATAD.

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The EU Anti Tax Avoidance Directive (ATAD) comes into force with effect from 1 January 2019 and contains two articles setting out detailed rules in relation to controlled foreign companies (CFCs). Two specific changes to the UK CFC rules will need to be made in order to ensure they are fully compliant with ATAD. These relate to the definition of control, and the treatment of certain profits generated by UK activity. Finance Bill 2018-19 published on 7 November contains legislation that addresses these changes.

Definition of control

Background

The current UK CFC measure of control does not take into account interests held in the CFC by non-resident associates or related parties, whereas ATAD requires all associated enterprises to be taken into account when assessing control.

What are the proposed changes?

The legislation seeks to amend the existing CFC rules so that any interests held by associated enterprises (irrespective of where those associated enterprises are resident) are taken into account when assessing control. An associated enterprise in relation to a UK resident company is defined as either having a direct or indirect 25 percent investment in the UK resident company (or vice versa), or mutual 25 percent ownership in the associated enterprise and the UK resident company by a third party.

What will the impact be?

As a result of the changes, subsidiaries of UK companies which were not previously within the scope of the UK CFC rules may now be.
Groups should perform a review of their existing group structures to ascertain whether any subsidiaries of UK companies could be within the scope of the UK CFC rules as of 1 January 2019. To the extent any new CFCs are identified, an analysis will be necessary to determine the extent to which a CFC charge may be expected to arise as a result of the CFC’s activities.

UK Significant People Functions (SPFs)

Background

Broadly, a CFC’s non-trading finance profits (NTFPs) derived from UK SPFs, UK capital investment, UK finance leases and specified arrangements in lieu of dividends will fall within gateway Chapter 5 and give rise to a CFC charge. However, the Chapter 9 FinCo exemption (by election) currently provides either a full or 75 percent exemption for such NTFPs passing through the gateway Chapter 5 which arise from qualifying loan relationships. NTFPs therefore only pass through the CFC charge gateway to the extent that they are not exempt under Chapter 9.

What are the proposed changes?

NTFPs which fall within Chapter 5 by virtue of UK SPFs will no longer qualify for the FinCo exemption.

What will the impact be?

Groups with existing FinCo structures will need to revisit the SPFs for each loan balance that exists on 1 January 2019. The SPFs could be a combination of ongoing activities associated with the management of the loan and activities and decision making that took place at the inception of the loan or at any time the terms of the loan were previously amended.

Groups looking to implement new FinCo structures or to refinance existing FinCo structures will need to undertake a detailed SPF analysis with regards to the issue and ongoing management of new loans.

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