.png)
.png)
The foreign profits package will be introduced in Finance Bill 2009 after a long period of consultation.
Foreign dividends and other distributions received are currently chargeable to corporation tax, with credit given for any foreign tax withheld from a dividend and (for shareholdings of 10% or more) for foreign tax charged on the profits out of which the dividend is paid (underlying tax).
Currently, UK distributions received are generally exempt from corporation tax.
The new legislation will treat foreign and UK distributions in the same way. Distributions will generally be exempt if they fall into an exempt class and anti-avoidance provisions do not apply.
The vast majority of distributions are expected to be exempt from corporation tax.
In addition to the changes announced in the Pre-Budget Report, exemption for dividends or other distributions arising from holdings of 10% or more will be extended to all companies.
These will apply to dividends and other distributions received on or after 1 July 2009.
The new legislation introduces a debt cap which caps the tax deduction for finance expense payable by UK members of a group of companies to the consolidated gross finance expense of that group.
Following consultation a number of changes are proposed to the draft legislation.
These include:
- the way in which the net finance expense is calculated;
- the calculation of the consolidated gross finance expense; and
- introducing or amending a number of exclusions to deal with, for example, financial services, finance expense in respect of short term debt, group treasury companies and relatively small amounts of net finance expense.
The debt cap applies to finance expense payable in accounting periods beginning on or after 1 January 2010.
The changes to the controlled foreign companies regime will remove the exemption for superior and non-local holding companies (subject to a two year transitional period) and the acceptable distribution policy exemption. The exemption for local holding companies will be retained.
The changes have effect for accounting periods starting on or after 1 July 2009 with provision made for accounting periods that straddle this date.
However, the exemption for non-local and superior holding companies may be available for qualifying companies in a transitional form until 1 July 2011.
With regards to Treasury consents, the existing legislation requires companies to obtain approval from HM Treasury before undertaking certain transactions involving subsidiary companies resident outside the UK.
The changes will repeal the existing legislation. In its place the Government intends to introduce a modernised post-transaction reporting requirement that applies to transactions with a value of £100 million or more subject to a number of exclusions.
These include several based on the existing ‘general consents’ rules and an exclusion for trading transactions. Companies must make a report within six months of the transaction.
The new reporting requirement applies to transactions undertaken on or after 1 July 2009.
The draft legislation published on 9 December 2008 included provision for loan relationships and derivative contracts forming part of arrangements that have a tax avoidance purpose.
The case for further legislation in this area will be kept under review, but the measure will not form part of Finance Bill 2009.
These announcements have been ‘keenly awaited’, said Roopa Aitken of Grant Thornton. ‘It is very helpful to have start dates for the various proposals as this gives businesses clarity’.
Ms Aitken welcomed the extension of the dividend exemption for 10% or more shareholdings. The debt cap was less welcome, but she was pleased that it is not to be introduced until next year as this gives businesses ‘time to get to grips with the complex rules surrounding it’.
Likewise, the CIOT was happy that the timing announced by the Chancellor recognises the need for some delay in the start date of the worldwide debt cap measures, as this will allow companies time to understand these major changes and help provide certainty.
Peter Cussons of PricewaterhouseCoopers LLP was concerned that the cap may result in businesses deciding to relocate away from the UK, saying ‘continuing with the interest cap rules, with implementation from the start of accounting periods beginning on or after 1 January 2010, may still prove too much for some UK based businesses with overseas operations; and for some inbound companies.
'Ultimately the impact may result in some businesses considering their options in other territories outside the UK, and may discourage investment into the UK from overseas.
‘The retention of the controlled foreign company local holding company exemption will nonetheless be widely welcomed by business,’ he added, ‘as it is often necessary for regulatory or other business reasons'.
