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Finance Act 2012

Chapter 22 – Supplementary Provision

436.New section 371VA provides definitions for the purposes of Part 9A.

437.New section 371VB provides the rules for identifying the commencement and cessation of an accounting period of a CFC.

438.New subsections (2) and (3) provide the basic rules. There are two circumstances resulting in the commencement of an accounting period. An accounting period will commence either when a CFC first becomes a CFC, or, if it is already a CFC and continues to be a CFC, immediately after the end of the previous accounting period. There are four circumstances which terminate an accounting period. An accounting period will come to an end if:

  • the CFC ceases to be a CFC;

  • the CFC becomes or ceases to become liable to tax in a territory due to a change in its domicile, residence or place of management;

  • the CFC ceases to have any source of income; or

  • a company with a relevant interest (as defined in Chapter 15) no longer has that interest or ceases to be within the charge to corporation tax.

439.Without affecting subsections (2) and (3), new subsection (4) applies certain sections of Chapter 2 of CTA 2009 which provide further rules on accounting periods.

440.New subsections (5) and (6) provide rules that allow an officer of Revenue and Customs to specify an accounting period by issuing a notice. If it appears to an officer of Revenue and Customs that there is uncertainty as to when an accounting period either commences or ceases then they may issue a notice to the CFC specifying the accounting period which they consider appropriate, which must not exceed 12 months.

441.New subsections (7) to (9) provide for a circumstance where, after the issue of a notice under subsection (6), further facts come to the knowledge of an officer of Revenue and Customs and it appears to an officer of Revenue and Customs that the accounting period specified in the notice is not the correct accounting period. An officer of Revenue and Customs must issue another notice amending the earlier notice to specify the correct accounting period. This requires the officer of Revenue and Customs to amend the notice where it appears that the notice is incorrect. A notice or amended notice must be given to each company which the officer of Revenue and Customs considers likely to be liable to a CFC charge in the CFC’s accounting period in question.

442.New section 371VC sets out what is meant by “accounting profits”. It explains that the CFC’s accounting profits for an accounting period are its pre-tax profits for the period. Where the accounting profits are disclosed in financial statements prepared for the accounting period in accordance with an acceptable accounting practice then the CFC’s pre-tax profits are to be determined based on the amounts disclosed in those financial statements, unless new subsections (4) and (5) apply.

443.New subsection (4) gives effect to new subsection (5) if the CFC’s financial statements for the accounting period are not prepared in accordance with an acceptable accounting practice or the CFC’s financial statements are not prepared within 12 months after the end of the CFC’s accounting period.

444.If subsection (5) applies to a CFC that normally prepares financial statements according to acceptable accounting practice, its accounting profits must be based on amounts that would have been disclosed in financial statements if its usual practice had been adopted. In any other case the CFC’s profits are to be based on international accounting standards.

445.New subsection (6) defines what is meant by “acceptable accounting practice” for section 371VC. It is any of the following:

  • international accounting standards,

  • UK generally accepted accounting practice, or

  • an accounting practice which is generally accepted in the CFC’s territory of residence for the accounting period.

446.New subsection (7) explains that references in section 371VC to amounts disclosed in financial statements include amounts comprised in amounts so disclosed. This covers a situation where an amount is disclosed in the financial statements of a CFC as part of a cumulative total or larger balance.

447.New subsection (8) explains the method for converting the CFC’s accounting profit (or amounts included in them) into sterling where they are stated in another currency. They should be translated to sterling using the average rate of exchange for the accounting period calculated on daily spot rates.

448.New section 371VD explains the further adjustments required to determine a CFC’s accounting profits identified in section 371VC. The computation can be summarised as follows.

449.In the computation above:

  • where there is more than one settlor or beneficiary of the settlement, the income accruing to the trustees is apportioned between the CFC and the other settlors and beneficiary on a just and reasonable basis,

  • partnership for these purposes includes any entity established in a territory outside of the UK that has characteristics of a partnership and partner is to be read accordingly, and

  • the pre-tax profits arsing under section 371VC should be adjusted to take account of the transfer pricing rules in Part 4 of TIOPA, unless after making the adjustment, the difference in the profits (which are referred to in the legislation as the assumed total profits) is greater than £50,000.

450.New section 371VE covers cell companies. New subsection (1) explains that Part 9A can apply to both unincorporated and incorporated cells as if they were non-UK resident companies.

451.New subsections (2) and (3) define “unincorporated cell” as an identifiable part of a relevant company (by whatever name known) that meets the conditions in subsection (3). The conditions may be met by reference to the law under which the relevant company is incorporated or formed, the articles of association or other document regulating the relevant company, or the terms of any arrangement entered into by or in relation to the relevant company. The conditions are that assets and liabilities of the relevant company may be wholly or mainly allocated to the unincorporated cell, such that the cell’s liabilities are met wholly or mainly out of its assets and there are members of the company whose rights are wholly or mainly limited to the cell’s assets.

452.New subsection (4) provides that subsection (1) does not affect the status of the non-UK resident company, which is treated as having an unincorporated cell under subsection (2), as a company for the purposes of Part 9A, but it requires the assets and liabilities of the company to be apportioned between it and all the unincorporated cells which are part of the company on a just and reasonable basis.

453.New subsection (5) defines an “incorporated cell”. It is an entity which would not (apart from this section) be a company, is established either under the articles of association or other document regulating a non-resident company, and which has a legal personality distinct from that of the non-UK resident company under the law under which the company is incorporated or formed. This definition applies irrespective of the name given to the incorporated cell.

454.New subsection (6) confirms that treatment as an incorporated cell under subsection (5) does not affect the status of the non-UK resident company as a company for the purposes of Part 9A.

455.New subsections (7) and (8) provide the power for the Treasury to make regulations which provide for Part 9A to apply to parts of companies falling within specific descriptions or to other non-corporate entities, as if they were non-UK resident companies.

456.New section 371VF sets out the rules for identifying connected persons for the purposes of Part 9A. This includes persons who are “associated” or “connected” to the CFC as those terms are defined in section 882(2) to (7) and 1122 of CTA 2010 respectively.

457.New section 371VF(3) provides that a person is related to a CFC if any of the three following circumstances exists.

  • the person is connected or associated with the CFC (as defined above),

  • if there were to be a CFC charge, at least 25 per cent of the CFC’s chargeable profits would be apportioned to the person, or

  • if the CFC is a CFC by virtue of section 371RC, the person is connected or associated with either or both of the controllers.

458.New section 371VG(1) defines non-trading finance profits for the purposes of Part 9A. It includes:

  • any amounts included in the CFC’s assumed total profits on the basis that they would be chargeable to tax under section 299 of CTA 2009 (charge to tax on non-trading profits from loan relationships);

  • any amounts chargeable to tax under Part 9A of CTA 2009 (company distributions);

  • amounts arising on relevant finance leases (as defined in section 371VA) which are not trading profits.

459.New subsection (2) provides that the amounts of non-trading finance profits determined under subsection (1) must take account of:

  • the treatment of credits and debits relating to a CFC’s property business provided by new subsection (3),

  • the exclusion of profits to which Chapter 8 (solo consolidation) applies,

  • the exclusion of the CFC’s qualifying loan relationships if section 371CB(8) applies, and

  • that non-trading finance profits should include the trading and non-trading finance profits of a treasury company that has issued a notice to that effect to Revenue and Customs under section 371CE(2)(b).

460.New subsection (3) provides that non trading finance profits should exclude any credits or debits included in determining the CFC’s property business profits as defined at new section 371VI(2). These are profits of the CFC arising from debtor relationships that have been entered into for the purposes of the exempt property business rather than for the purposes of on-lending to any other person.

461.New subsections (4) and (5) define trading finance profits as any amounts which are trading profits by virtue of section 297, 573 or 931W of CTA 2009 and any trading profits arising on relevant finance leases, but that in the case of a group treasury company, this is subject to the treatment of trade profits as non-trading finance profits if a notice under section 371CE(2) is issued.

462.New sections 371VH(1) to (2) provide the basic rules for identifying persons who have an “interest” in a company for Part 9A. New subsection (2) gives four circumstances that will mean a person has an “interest” in a company. In addition to persons having rights obtained by the holding of shares, these include any person who it is reasonable to suppose would receive or participate in distributions of the company, or would be able to secure that income or assets of the company would be applied for the person’s benefit. It also includes a person who can control the company, either alone or with other persons.

463.New subsections (3) to (8) expand and provide meanings for some of the terms used in subsection (2).

464.New subsection (4) covers circumstances where a person’s entitlement to secure that the income or assets of a company in subsection (2)(c) is contingent (under an any form of agreement) on a default by either the company or any other person. The person will not be treated as having an interest unless the default has already occurred.

465.New subsections (5) and (6) exclude rights that a person has as a loan creditor, which are not “interests” for these purposes. The meaning of loan creditor for these purposes is that given in section 453 of CTA 2010, except that the exclusion in subsection 453(4) of CTA 2010 for loans made in the ordinary course of a banking business is set aside. References to a person being entitled to do anything cover a present entitlement to do that thing at a future date and a future entitlement to do it.

466.New subsections (7) and (8) exclude from subsection (5) any rights arising from a loan relationship with an embedded derivative. An embedded derivative takes the meaning given to it at section 415(1)(b) of CTA 2009. Section 415 of CTA 2009 operates by reference to GAAP, so where the loan creditor does not prepare accounts under GAAP it is assumed to have done so for the purposes of determining whether a right from an embedded derivative exists.

467.New subsections (9) and (10) cover a situation where a CFC is a CFC because it falls within the control anti avoidance rule in section 371RG. In such circumstances, the rule in section 371RG(3) will determine the persons who have “interests” in the CFC and the nature of those interests.

468.New subsections (11) to (13) cover a circumstance where a person (or two or more persons together) have an interest in a company and that company has an interest in a second company. Each of those persons has an interest in the second company equivalent to a proportion of the first company’s interest, determined by reference to the extent of that person’s interest in the first company. For example, where person A has a 50 per cent interest in company 1 which has an 80 per cent interest in company 2, these provisions treat person A as having an interest equal to 50 per cent of company 2’s interest. Hence A has a 40 per cent interest in company 2.

469.New subsection (14) covers a situation where two or more persons jointly have an interest in a company other than in a fiduciary or representative capacity. It treats them as having the interest in equal shares.

470.New section 371VI covers the meaning of “property business profits”. By new subsection (1) these are the profits of a CFC for the accounting period in question that are included in its assumed total profits on the basis that they would be chargeable profits under Part 4 of CTA 2009 (property income).

471.New subsections (2) to (5) provide for further adjustments to be made to the amount of property business profits to take account of credits and debits brought in under Part 5 of CTA 2009 as a consequence of the CFC being in a debtor relationship, where the loan is the subject to the debtor relationship or because the credits and debits relate to a derivative contract or other hedging arrangement entered into by the CFC as a hedge of risk in connection with the relevant property business and are attributable to hedging of risk.

472.New subsection (6) provides a definition of “relevant property business.

473.New section 371VJ provides a power for regulations made under Part 9A to contain incidental, supplemental, consequential and transitional provision and savings.

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