Section 29: Restriction on Surrender of Losses: Controlled Foreign Company Cases
Summary
1.Section 29 amends section 105 of Corporation Tax Act 2010 (CTA 2010) so that chargeable profits of a controlled foreign company (CFC) which are apportioned to a surrendering company are included in the threshold which amounts listed under section 99(1)(d)-(g) CTA 2010 must exceed before group relief is available.
Details of the Section
2.Sections 2 & 3 replaces the term “gross profits” with “the profit-related threshold”.
3.New subsection 3A, inserted by section 4, defines “the profit-related threshold”. This is the sum of the surrendering company’s gross profits and the amount of the chargeable profits of a CFC apportioned to the surrendering company (on condition that it is a chargeable company for the purpose of the controlled foreign company rules). This new subsection applies in respect of chargeable profits of CFCs apportioned under section 371BC of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
4.New subsection 3B, inserted by section 4, includes in the “profit-related threshold” any chargeable profits of a CFC apportioned to the surrendering company under sections 747(3) and 752 of the Income and Corporation Taxes Act 1988 (ICTA 1988).
5.Section 5 inserts new subsection (5A) to section 105 which defines the terms “CFC” and “chargeable profits” by reference to the appropriate rules in either ICTA 1988 or TIOPA 2010. The definitions for these in the two Acts are slightly different and this section provides clarity on which rules need to be followed.
6.Sections 6-7 state that the amendments have effect where the surrender period of the surrendering company ends on or after 20 March 2013. However, the chargeable profits of a CFC for accounting periods ending before 20 March 2013 are not included.
7.Section 8 -9 says that where the accounting period of the CFC falls partly before and after 20 March 2013, the chargeable profits that relate to the period are apportioned, with the section not applying to the chargeable profits apportioned to part ending before 20 March 2013.
Background
8.This section is one of three that close existing loopholes in the loss rules.
9.This section shuts down a loophole whereby a company can divert profits to a controlled foreign company (CFC) so as to reduce its ‘gross profits’ for a period – allowing it to access losses that would not otherwise be surrenderable under section 105 CTA 2010.
10.Where one company is the 75% subsidiary of another company or where both are the 75% subsidiary of a third company one company may surrender losses and other amounts to another company, by way of group relief.
11.There are seven different categories of losses, expenses and deficits that can be surrendered under the group relief rules (section 99 (1) CTA 2010). Four of these (referred to at section 99(1)(d)-(g)) can only be surrendered if together they exceed the surrendering company’s ‘gross profits’ for a period. The legislation at section 105 describes how this restriction works.
12.CFC apportioned profits are self assessed, with the resulting tax charged on the UK company as an amount equivalent to corporation tax.
13.This section will ensure that apportionments in respect of CFC’s profits will be taken in to account as well as gross profits in computing whether any of the second type of losses can be surrendered.
14.The threshold covers apportionments under both the old and new rules for CFCs (contained in Chapter 4 of Part 17 of the Income and Corporation Taxes Act `1988 and Part 9A of the Taxation (International and Other Provisions) Act 2010, respectively). The old rules apply to an accounting period of a CFC that straddles 1 January 2013; the new rules apply to an accounting period beginning on or after 1 January 2013.
