Chapter 20 - Residence of CFCs
392.New section 371TA sets out the rules for determining the tax residence of a CFC. The rules retain substantially the same effect as the repealed sections 749 and 749A of the ICTA. The rules apply for the purposes of Part 9A but make reference to additional rules relating to residence for the excluded territories exemption (ETE) and the tax exemption (TE).
393.New subsection (1) provides the basic rule for determining the territory of tax residence of a CFC. The first step is to apply the general residence rules at new section 371TB. These are explained below. If it is not possible to determine a territory of residence under the general rules then new subsection (1)(b) applies, which is in two parts. Under new subsection(1)(b)(i), if a CFC is UK incorporated but under section 18 CTA 2009 it is treated as resident in another territory in accordance with the UK’s tax treaty with that territory, then it is treated as resident in that other territory. Otherwise it is treated as resident in the territory in which it is incorporated or formed.
394.New subsection (3) provides that the section is subject to two rules elsewhere in Part 9A where the residence rule is adapted. The first is an additional rule for the ETE set out in section 371KC which requires the CFC, or persons with an interest in the CFC, to be liable to tax in the CFC’s territory of residence in order for the rule in subsection (1)(b) to apply. A company is regarded as liable to tax in a particular territory if it is within the charge to tax there even though it may pay no tax because of, for example losses or double tax relief.
395.The second is an additional rule for the tax exemption set out in step 1 of section 371NB(1), which provides that a CFC cannot benefit from the tax exemption unless a territory of residence can be determined under the general rule in new section 371TB.
396.New section 371TB provides the general rules to determine the territory in which a CFC is resident. The legislation refers to “territory” throughout rather than “country” so that it covers jurisdictions such as the Channel Islands and the Isle of Man which do not have full independent status. However, in its application to federal states such as the U.S.A. and Switzerland, “territory” signifies the country and not an individual state.
397.New subsection (1) states that the CFC is taken to be resident in the territory under the law of which it is liable to tax by reasons of its domicile, residence or place of management at all times during the accounting period.
398.This rule may result in a company being regarded as resident in more than one territory and so new subsection (2) states that where there could be two or more eligible territories of residence, the CFC can only be resident in one of those territories.
399.New subsection (3) provides that in determining which of the eligible territories should be the territory of residence the rules in new subsections (4) to (9) should be applied. Where more than one of those subsections may apply to determine the residence of the CFC, the earliest subsection takes precedence.
400.New subsection (4) provides that where an election or designation of residence has been made for an earlier accounting period in respect of one of the eligible territories, that is the territory of residence.
401.New subsection (5) requires that where the CFC’s place of effective management is carried on in one (and only one) of the eligible territories then that territory is the territory of residence.
402.New subsection (6) deals with the case where the CFC’s place of effective management is carried on in two or more of the eligible territories. If this is the case, an eligible territory in which more than 50 per cent of the CFC’s assets are held (priced at their market value immediately before the end of the CFC’s accounting period) is the territory of residence.
403.If a company is resident in more than one territory but the rule in subsection (6) doesn’t apply because none of the eligible territories in which effective management is undertaken hold a majority of the CFC’s assets, new subsection (7) provides that any other eligible territory in which more than 50 per cent of the CFC’s assets are held (priced at their market value immediately before the end of the CFC’s accounting period) is the territory of residence.
404.New subsection (8) provides that, if an election specifying an eligible territory is made by certain chargeable companies in accordance with new section 371TC(1) then that territory is the territory of residence.
405.New subsection (9) provides that if an officer of Revenue and Customs designates a territory on a just and reasonable basis (see new section 371TC(5) to (7)) then that territory is the territory of residence.
406.Because earlier subsections take priority over later ones, an election or designation is likely to be made in circumstances where both effective management and all of the CFC’s assets are located outside of the territories in which the CFC is liable to tax under the main rule at subsection (1).
407.New section 371TC provides for elections and designations about residence with new subsection (1)(a) to (f) setting out the form in which an election is to be made.
408.New subsections (2) and (3) explain which companies may make an election. These are the companies in the group, individually or in combination, to which more than half of the CFC’s chargeable profits would be likely to be apportioned if the company or companies were to be subject to the CFC charge.
409.New subsection (6) states that a designation of an eligible territory made by an officer of Revenue and Customs is irrevocable. Under new subsection (7), the officer making the designation must give notice of the designation to each of the companies which would be likely to be a chargeable company, were the CFC charge to be charged in relation to the accounting period.
410.New subsection (8) specifies what information the notice must contain.
411.New subsection (9) sets out that the election or designation of residence will apply to the CFC’s accounting period and each successive accounting period (even if the interest-holders in the CFC or the extent of their interest change) until such time as new subsection (10) is applicable to an accounting period.
412.New subsection (10) has the effect that the election or designation will not continue to be valid for an accounting period if one or more territories which were eligible territories in the accounting period covered by the original election or designation no longer fall within section 371TB(1), or some other territory also falls within section 371TB(1) in the later period.
