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Finance Act 2012

Chapter 12 - The low profits exemption

262.New section 371LA introduces Chapter 12, which contains the low profits exemption. This chapter exempts a company with low profits from a CFC charge, subject to certain conditions. The exemption applies by reference to either the CFC’s accounting profit or its assumed taxable total profits.

263.New section 371LB(1) sets out the basis for applying the low profits exemption for an accounting period of the CFC.

264.New subsections (2) and (3) provide for the exemption to apply if the CFC’s accounting profits or assumed taxable total profits respectively for the accounting period are not more than £50,000. The meaning of accounting profits is given by new sections 371VC and 371VD, and of assumed taxable total profits by new section 371SB(1) to (6).

265.New subsection (4) provides for the exemption to apply if the CFC’s accounting profits are not more than £500,000 for the accounting period and the amount of those profits that represent non-trading income does not exceed £50,000.

266.New subsection (5) makes equivalent provision in terms of the CFC’s assumed taxable total profits.

267.New subsection (6) provides for the specified amounts to be proportionately reduced for an accounting period of less than 12 months.

268.New section 371LC provides anti-avoidance rules for the low profit exemption.

269.New section 371LC(1) provides that the exemption does not apply if either of two conditions, A or B, is met.

270.New subsection (2) sets out condition A, which applies where an arrangement entered into at any time has as its main purpose or one of its main purposes to secure the low profit exemption for either the relevant accounting period or one or more accounting periods of the CFC, where had it not been for these arrangements, no exemption would have been due.

271.New subsections (3) and (4) set condition B. Condition B applies if at any time during the accounting period, a CFC’s business is, wholly or mainly, the provision of “UK intermediary services”. A CFC provides UK intermediary services if it enters into a contract with a UK resident person (“the client”) to provide the services of a UK resident individual (the “service provider”), which the service provider personally performs, or is under an obligation personally to perform for the client.

272.New subsections (5) and (6) provide that no exemption by reference to accounting profits is available if a third condition, condition C, is met. Condition C applies where in determining the CFC’s assumed taxable total profits, Part 21B of CTA 2010 (group mismatch schemes) has effect so as to exclude an amount from being brought into account as a debit or credit for the purposes of Part 5 of CTA 2009 (loan relationships) or Part 7 of that Act (derivative contracts).

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