Proposed CFC gateway test updated

The Treasury have updated the proposed gateway test for CFCs this evening (http://www.hm-treasury.gov.uk/controlled_foreign_companies.htm), with revised draft legislation following the blindingly short (11 days) consultation period that closed on 10th February 2012, after release on 31st January 2012.

A quick review

The gateway idea means that, if your foreign sub meets one of three conditions, the profits from that sub will be outside the CFC rules - no need to go any further into the significant people function analysis etc.  There's also a new introductory chapter, describing the scope of the rules and the role of the other chapters: this is intended to assist users. I have an unpleasant feeling that more words just means more scope for argument later. I may be an unreconstructed cynic, but can see Tribunal arguments in a few years that compare and contrast this introduction with the later chapters.

The tests are (paraphrased):

  • no significant management/control of the subsidiary's assets or risks in the UK
  • sub has the capacity to carry on business within any non-significant UK activities within the first test (e.g.: the UK provides back-office functions that could be bought in from a third party)
  • the arrangements do not have a main purpose of achieving a UK tax reduction (*cough*. This had to be in there somewhere, of course).

The motive test is dead, long live the motive test.

HMRC state that "the CFC charge can apply only to the extent that profits are positively identified as within the charge, rather than being always subject to charge unless an exemption applies".  It's a slightly twisted version of "positively identified" - profits are within the charge if they fail all three tests. That is to say, profits don't meet test 1, don't meet test 2 and don't meet test 3. That feels like negative identification to me, but that's probably nitpicking.

The update also includes some changes on CFC charges from partially exempt loan relationships (limiting the charges, exempting certain profits) and the targeted anti-avoidance rules (no detail, but the Government is considering narrowing the scope of some of these).  

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