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Finance Act 2011

Status:

This is the original version (as it was originally enacted).

2After section 751AA of that Act insert—

751ABReduction in chargeable profits: failure to qualify for exemptions

(1)This section applies if—

(a)an apportionment under section 747(3) would fall to be made as regards an accounting period (“the relevant accounting period”) of a controlled foreign company,

(b)but for a relevant failure, section 748(1)(ba) or (bb) would have prevented such an apportionment, and

(c)a company resident in the United Kingdom (“the UK resident company”) has a relevant interest in the controlled foreign company in that period.

(2)“Relevant failure” means—

(a)in the case of section 748(1)(ba), one or both of the following—

(i)a failure to satisfy the requirement of paragraph 12E of Schedule 25 (requirement as to company’s UK connection) in circumstances where the requirement would be satisfied if the reference in sub-paragraph (3)(a) of that paragraph to 10% were a reference to 50%, and

(ii)a failure to satisfy the requirement of paragraph 12F of that Schedule (finance income and relevant IP income) in circumstances where the relevant IP income of the controlled foreign company for the accounting period does not exceed 5% of the company’s gross income for that period, and

(b)in the case of section 748(1)(bb), a failure to satisfy the requirement of paragraph 12M of that Schedule (finance income).

(3)The UK resident company may make an application to the Commissioners for Her Majesty’s Revenue and Customs for the chargeable profits of the controlled foreign company for the relevant accounting period (“the chargeable profits”) to be reduced to an amount specified in the application (“the specified amount”).

The specified amount may be nil.

(4)If the Commissioners grant the application—

(a)the chargeable profits are treated as reduced to the specified amount, and

(b)the controlled foreign company’s creditable tax (if any) for that period is treated as reduced by so much of that tax as, on a just and reasonable basis, relates to the reduction in the chargeable profits,

for the purpose of applying section 747(3) to (5) for determining the sum (if any) chargeable on the UK resident company under section 747(4)(a) (but for no other purpose).

(5)The Commissioners may grant the application only if—

(a)they are satisfied that the specified amount is not less than the relevant amount, and

(b)they have not previously granted an application made by the UK resident company in respect of the relevant accounting period under section 751A or 751AC.

(6)“The relevant amount” means—

(a)if the relevant failure is within subsection (2)(a), the sum of—

(i)the excess finance and IP income (if any) for the relevant accounting period, and

(ii)in a case where there is a failure specified in subsection (2)(a)(i), so much (if any) of the net chargeable profits for that period as are not excluded by subsection (8), and

(b)if the relevant failure is within subsection (2)(b)—

(i)the amount (if any) by which the controlled foreign company’s finance income for the relevant accounting period exceeds 5% of its gross income for that period, or

(ii)if that amount is a negligible amount, nil.

(7)“The excess finance and IP income” for the relevant accounting period means—

(a)the amount (if any) by which the total of the controlled foreign company’s finance income and relevant IP income for that period exceeds 5% of its gross income for that period, or

(b)if that amount is a negligible amount, nil.

(8)Net chargeable profits are excluded by this subsection if, and to the extent that, they can reasonably be regarded—

(a)as representing the net economic value which—

(i)arises to the appropriate body of persons (taken as a whole), and

(ii)is created directly by qualifying work, or

(b)as not being wholly or partly attributable, directly or indirectly, to transactions with persons within the charge to United Kingdom tax.

(9)In subsection (8)(a) “qualifying work” means work which—

(a)is done in the territory in which the controlled foreign company is resident, and

(b)is done in that territory by individuals working for the controlled foreign company there.

(10)A transaction with a company which is within the charge to United Kingdom tax only because it carries on a trade in the United Kingdom through a permanent establishment there is within subsection (8)(b) only if the transaction is attributable to activities carried on through that establishment.

(11)For the purposes of subsections (8) and (9)—

(a)section 751A(5), (6) and (9) applies as it applies for the purposes of the equivalent provisions of section 751A, and

(b)paragraph 5(2) to (5) of Schedule 25 (residence of controlled foreign company) applies as it applies in relation to Part 2 of that Schedule.

(12)In this section—

  • “finance income” has the meaning given by paragraph 12F(3) of Schedule 25 (with references to C read as references to the controlled foreign company);

  • “relevant IP income” has the meaning given by paragraph 12F(4) of that Schedule;

  • “net chargeable profits” means chargeable profits excluding so much of those profits as is directly attributable to the finance income or relevant IP income of the controlled foreign company;

  • “UK-connected gross income” has the same meaning as in paragraph 12E of Schedule 25;

  • “United Kingdom tax” means corporation tax or income tax;

and paragraph 12G of that Schedule (gross income) applies for the purposes of this section as it applies for the purposes of Part 2A of that Schedule (with references to C read as references to the controlled foreign company).

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