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UK Tax Law Update

UK Treasury Releases Long-Awaited Corporation Tax Reform "Roadmap"

Hidden amongst the bargains to be found on the internet on "Cyber Monday" was a bulk offer on UK corporation tax announcements – a three for one deal, available here

HM Treasury released a document which provided some long awaited further detail on proposed reforms of the UK's:

  • controlled foreign company regime;
  • regime for the taxation of intellectual property; and
  • non-UK branch taxation regime.

The document also confirmed that the government is not proposing to change the UK's relatively generous interest deductibility rules, and interestingly makes no mention of the possible "General Anti-Avoidance Rule" or "GAAR" which was the subject of an informal consultation earlier this year.  (Perhaps we will hear more on December 9th, when the government is expected to provide an update on its consultation on tax policy making - but the situation remains unclear.)

The introduction announces that Britain's "Government wants to send out the signal loud and clear that Britain is open for business." Whether this is a signal that multinational businesses of the kind that have in recent years been re-domiciling out of the UK will heed, only time will tell.

Controlled Foreign Companies ("CFCs")

The coalition government plans to legislate a new CFC regime in Finance Act 2012. Further details will come in Spring 2011, but an entity-based regime is expected, with overseas profits being taxed in the UK to the extent that they have been artificially diverted away from the UK. There will be various exemptions, and the banking, property and insurance sectors will be the subject of specific tailored rules.

For finance CFCs a pragmatic approach is being suggested, with "thickly capitalized" CFCs being targeted. It is expected that there will be a partial exemption based on a test of the ratio of debt to equity, with the threshold expected to be perhaps 1:2. A CFC which has a debt:equity ratio of 1:2 or higher is likely to be exempt. However, to the extent that a CFC's leverage is lower than 1:2 its finance income will become proportionately taxable in the UK. CFCs with a shorter term treasury function may be fully exempted.

In relation to IP owning CFCs, the proposed "earn-out" charge on the exportation of IP from the UK (with post-export increases in value taxed in the UK) has thankfully been dropped. The proposal is to tax the "excessive profits" of IP owning CFCs which have been "artificially diverted" from the UK. The HM Treasury document includes some specific suggestions as to how tests for such profits could be devised. IP holding CFCs funded from the UK could also be subject to UK CFC charges on a "thick capitalization" basis similar to that proposed for finance CFCs.

Finance Act 2011 is also expected to include "interim improvements" to the existing CFC regime, with a new exemption for intra-group activities with a limited UK connection (meaning perhaps a maximum of 10% of income or expenses deriving from the UK). There is also a new 3 year "period of grace" when a CFC is acquired, and a change to the de minimis exemption.

Non-UK branch taxation

The non-UK branch exemption first proposed by the previous government last year is to be introduced in Finance Act 2011. The exemption is to be elective, which should reassure the industry sectors (such as oil and gas) that benefit from the current regime, and is expected to be on an irrevocable company-by-company basis.

Capital gains are to be included in the exemption on the basis of the division of taxation rights under the relevant UK double tax treaty (or the OECD model where there is no actual treaty).

Intellectual Property

The "Patent Box" regime first mooted in 2009's December Pre-Budget Report is to be legislated in Finance Act 2012 to be effective from 1st April 2013. The proposal is to tax net profits from patents held within the regime at a special rate of 10%. Patents which have not been commercialized prior to 30th November 2010 will be eligible for inclusion. Interestingly, GlaxoSmithKline responded to this announcement swiftly and positively, with suggestions it will invest 500m in UK manufacturing projects as a result.

The existing Research & Development Tax Credit regime is also considered in the document although significant change to the regime appears to be unlikely.

 

 

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