Finance Act 2011 will include some interim reforms to the controlled foreign companies* rules and, in particular, a new exemption for CFCs meeting certain conditions. In particular, the conditions include the requirement that the CFC must receive at most an incidental amount of IP income, where “incidental” ≤ 5%.
Secondly, FA 2011 will include a specific exemption from the CFC rules for a CFC with main business of IP exploitation; provided that the IP and CFC have minimal connection with the UK (ie: this is intended to exempt CFCs that do business almost entirely outside the UK). No specific thresholds are given, but when considering whether the IP has a minimal UK connection, the business should review whether the IP was ever held in UK, and whether any R&D was done in the UK. When considering whether the CFC has a minimal UK connection, the company should consider the extent/nature of any UK equity funding, whether there are any receipts from the UK, and what expenses have been incurred in the UK.
*CFC: for the non-tax specialists – a controlled foreign company is a subsidiary of a UK company that is located in a low/no tax jurisdiction. The CFC rules are intended to ensure that UK companies don’t dump profits into these subsidiaries to divert taxable income from the UK – they achieve this by taxing the UK parent on the profits of the CFC, unless an exemption is available. At present, the rules are rather more restrictive than is competitive or compatible with modern multinational business, and so reform is being considered as part of the corporate tax reform package.
IP tax regime review
HMRC commissioned a review of the IP tax regime, introduced in 2002, from Ipsos Mori. The conclusions aren’t wildly startling:
- The intangibles regime was considered important to decision making, in so far as intangibles were often felt to be vital to business success. However, it was not influential on what decisions were made - it influenced how deals were structured, rather than whether or not they took place at all.
- The UK regime was therefore typically felt to be of little consequence in acquisitions
- Ultimately, the UK regime was viewed as neither favourable nor unfavourable – taxation of intangibles was seen as part of doing business, rather than a direct influence on the decision making process.
- While the tax regime introduced in 2002 was appreciated by companies for making the law clearer, most did not believe that decision making regarding intangible assets would have been any different before this time.