1.—(1) These Regulations may be cited as the Controlled Foreign Companies (Excluded Countries) Regulations 1998, shall come into force on 31st December 1998, and shall have effect with respect to any appropriate accounting period of a relevant company.
(2) In this regulation–
“appropriate accounting period” means an accounting period ending on or after the day to be appointed under section 199 of the Finance Act 1994(1) (corporation tax self-assessment);
“relevant company” means a company resident in the United Kingdom that had a relevant interest in a controlled foreign company at any time during an accounting period of the controlled foreign company ending in an appropriate accounting period of the relevant company;
“relevant interest” shall be construed in accordance with section 752A(2) of the Taxes Act.
2.—(1) In these Regulations unless the context otherwise requires–
“controlled foreign company” shall be construed in accordance with section 747(2) of the Taxes Act;
“gains” in relation to a controlled foreign company means any gains of that company other than a gain accruing to the company on a disposal of an asset which, on the assumption that the company was within the charge to corporation tax, would have fallen to be treated as a chargeable gain and would not have been taken into account as a receipt in computing the company’s income or profits or gains or losses for the purposes of the Income Tax Acts;
“insurance company” means a company carrying on “long-term business” or “general business” within the meaning of section 1 of the Insurance Companies Act 1982(3);
“Schedule 1” and “Schedule 2” mean Schedule 1 and Schedule 2 respectively to these Regulations;
“section 748(1)(e)” means section 748(1)(e) of the Taxes Act;
“the Taxes Act” means the Income and Corporation Taxes Act 1988.
(2) For the purposes of these Regulations a company is resident in a territory if–
(a)by reason of the law of that territory relating to domicile, residence or place of management, the company is liable to tax in that territory, or
(b)if there is either no such law or such law does not apply to the company, the company is incorporated in that territory;
and references in these Regulations to the territory of residence of a company shall be construed accordingly.
(3) For the purposes of these Regulations a controlled foreign company is resident in a territory, within the meaning of paragraph (2), in an accounting period only if it is so resident throughout that accounting period.
(4) References in these Regulations to a branch or agency of a controlled foreign company are references to a branch or agency situated in a territory other than the territory of residence of the controlled foreign company.
3. The territory in which a controlled foreign company is required to be resident as respects an accounting period for the purposes of section 748(1)(e) is–
(a)as respects an accounting period beginning before 9th July 1998, any territory specified in Part I or in Part II of Schedule 1;
(b)as respects an accounting period beginning on or after that date, any territory specified in Part I or in Part II of Schedule 2.
4.—(1) Paragraph (2) specifies the condition which is required to be satisfied as respects an accounting period, for the purposes of section 748(1)(e), by a controlled foreign company which is resident in a territory specified in Part I of Schedule 1 or, as the case may be, in Part I of Schedule 2, in that accounting period.
(2) The condition specified is that the requirement with respect to the controlled foreign company’s income and gains specified in regulation 5 is satisfied by the controlled foreign company in relation to that accounting period.
(3) Paragraph (4) specifies the conditions which are required to be satisfied as respects an accounting period, for the purposes of section 748(1)(e), by a controlled foreign company which is resident in a territory specified in column 1 of Part II of Schedule 1 or, as the case may be, in column 1 of Part II of Schedule 2, in that accounting period.
(4) The conditions specified in this paragraph are that the controlled foreign company–
(a)satisfies the requirement with respect to its income and gains specified in regulation 5 in relation to that accounting period, and
(b)at no time during that accounting period–
(i)is entitled to any tax exemption, tax reduction or other benefit, or
(ii)falls within any condition,
specified in column 2 of Part II of Schedule 1 or, as the case may be, in column 2 of Part II of Schedule 2, opposite the specification of the territory in which the controlled foreign company is resident.
5.—(1) The requirement with respect to the income and gains of a controlled foreign company as respects an accounting period is that the amount of its non-local source income arising in that accounting period does not exceed whichever is the greater of–
(a)£50,000 or, where that accounting period is less than twelve months in duration, that amount proportionately reduced, and
(b)an amount equal to ten per cent. of its commercially quantified income arising in that accounting period.
(2) In paragraphs (1) and (3) “commercially quantified income” means the amount of profits of the controlled foreign company before tax, determined in accordance with generally accepted accounting standards other than an equity basis of accounting, but disregarding capital profits or losses.
(3) Subject to paragraph (4) (special rules for banks and insurance companies), for the purposes of paragraph (1) the amount of a controlled foreign company’s non-local source income arising in an accounting period is the aggregate of the following amounts, namely–
(a)the gross amount of income consisting of distributions recognised as income in computing the commercially quantified income of that company for that period from the profits of companies not resident in the territory of residence of that company, other than branch or agency income;
(b)the gross amount of income and gains recognised as income in computing the commercially quantified income of that company for that period and deriving from loans to, or deposits with, persons not resident in the territory of residence of that company, or branches or agencies situated outside that territory of companies resident in that territory, other than branch or agency income and gains;
(c)the gross amount of income and gains recognised as income in computing the commercially quantified income of that company for that period in relation to royalties payable by persons not resident in the territory of residence of that company, or by branches or agencies situated outside that territory of companies resident in that territory, other than branch or agency income and gains;
(d)the gross amount of income and gains recognised as income in computing the commercially quantified income of that company for that period in relation to premiums and rents payable in respect of property situated outside the territory of residence of that company by persons not resident in that territory, or by branches situated outside that territory of companies resident in that territory, other than branch or agency income and gains;
(e)the amount of any branch or agency income and gains recognised as income in computing the commercially quantified income of that company for that period, calculated in accordance with regulation 6;
(f)the gross amount of any income not falling within any of sub-paragraphs (a) to (e) above that is recognised as income in computing the commercially quantified income of that company for that period and does not constitute income which either–
(i)is treated under the laws of the territory of residence of that company as accruing or arising in, or derived from, that territory, or
(ii)where there are no laws of that territory treating that income as accruing or arising in, or derived from, that territory or another territory, would be treated as accruing or arising in, or derived from, that territory if there were such laws in force in that territory and those laws were identical to the laws of the United Kingdom treating income as accruing or arising in, or derived from, a territory for the purposes of the Corporation Tax Acts, and which
(iii)in either case is within that territory’s charge to tax.
(4) Where–
(a)the controlled foreign company concerned is an institution carrying on the business of banking, or an insurance company, and
(b)income of that company falling within any of sub-paragraphs (a) to (d) of paragraph (3)–
(i)is an integral part of income arising or accruing to the company from the trade of banking or insurance carried on by the company, being income which, if the company were resident in the United Kingdom, would be income arising to the company from a trade for the purposes of the Corporation Tax Acts, and
(ii)is within the charge to tax of the territory of residence of that company,
the aggregate amount of that income shall be disregarded in computing the aggregate amount of the company’s non-local source income.
6.—(1) The amount of any branch or agency income and gains as mentioned in regulation 5(3)(e) is–
(a)where the conditions specified in paragraph (2) are satisfied with respect to the branch or agency for the accounting period concerned, the amount (being not more than 10 per cent. of the net amount of the profits of that branch or agency for that period) by reference to which the condition specified in sub-paragraph (d) of that paragraph is satisfied by that branch or agency;
(b)where the conditions specified in paragraph (2) are not satisfied with respect to the branch or agency for the accounting period concerned, the net amount or, where paragraph (3) applies, the gross amount of the branch or agency income and gains for that accounting period.
(2) The conditions specified in this paragraph are that–
(a)the branch or agency is situated in a territory specified in Part I or in Part II of Schedule 1 or, as the case may be, in Part I or in Part II of Schedule 2, and where the territory is one specified in Part II of Schedule 1 or in Part II of Schedule 2, at no time during the accounting period–
(i)is entitled to any tax exemption, tax reduction or other benefit, or
(ii)falls within any condition,
specified in column 2 of that Part opposite the specification of that territory;
(b)the profits of the branch or agency are within the charge to tax of that territory;
(c)the profits attributed to the branch or agency for tax purposes in that territory are those which it might be expected to make if it were a distinct and separate enterprise from the company of which it is a branch or agency, engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the company of which it is a branch or agency;
(d)not more than 10 per cent. of the net amount of the profits of the branch or agency for the accounting period would, on the assumption that the branch or agency was not a branch or agency of the controlled foreign company but a separate controlled foreign company, be attributable to the aggregate of the gross amounts of any income and gains falling within any of sub-paragraphs (a) to (d) of regulation 5(3) and arising outside the territory in which the branch or agency is situated;
(e)amounts falling to be deducted in computing the taxable profits of the branch or agency, being amounts which are paid to, or are in respect of costs incurred by, the head office of the company of which it is a branch or agency, either–
(i)are liable to tax, or are disallowed as an expense, in the territory of residence of that company, or
(ii)where that company is liable to tax in its territory of residence in respect of the whole of its profits wherever arising, are not allowed as a deduction in computing the taxable profits of that company except where the amount in question is paid by that company to another person.
(3) This paragraph applies to a case where the net amount of the income and gains referred to in paragraph (1) in the accounting period concerned does not exceed an amount which would be equal to the aggregate of the gross amounts of any income and gains falling within any of sub-paragraphs (a) to (d) of regulation 5(3) in that period if branch or agency income and gains fell within those sub-paragraphs.
7.—(1) In regulation 5(2) “capital profits or losses” means profits or losses arising in relation to chargeable assets.
(2) In regulations 5(3) and 6 references to “branch or agency income” or to “branch or agency income and gains” are references to income and gains that–
(a)arise in or are derived from any branch or agency of a controlled foreign company, and
(b)fall within sub-paragraph (e) of regulation 5(3) in the accounting period concerned.
(3) In regulation 5(3)–
(a)the references to “the gross amount” of any income in sub-paragraphs (a) and (f) are references to the amount of that income before deduction of expenses or reserves;
(b)the reference to “the gross amount” of any income and gains in sub-paragraph (b) is a reference to the amount of that income and those gains found–
(i)after excluding any gain or loss arising on any loan or deposit referred to in that sub-paragraph which is offset by a loss or gain on a contract ancillary to that loan or deposit which would be a qualifying contract if the company were a qualifying company, and
(ii)after deducting any exchange losses attributable to the loans or deposits referred to in that sub-paragraph to the extent that those losses have not already been excluded by virtue of paragraph (i) above, but
(iii)before deducting other expenses or reserves;
(c)the references to “the gross amount” of any income and gains in sub-paragraphs (c) and (d) are references to the amount of that income and those gains found after deducting any exchange losses attributable to the royalties, premiums or rents referred to in those sub-paragraphs but before deducting other expenses or reserves;
and the references to “the gross amounts” in regulation 6(2)(d) and (3) shall be construed accordingly.
(4) In regulation 5(3) references to persons not resident in the territory of residence of a controlled foreign company do not include references to a company not so resident in circumstances where–
(a)the branch or agency of the company is situated in that territory, and
(b)the transaction giving rise to the income and gains in question of the controlled foreign company is made with that branch or agency.
(5) In regulation 6(1)(b) the reference to the gross amount of income and gains is a reference to the amount of that income or of those gains before deduction of expenses or reserves.
(6) In regulation 6(1)(b) the reference to “the net amount” of the branch or agency income and gains, and in regulation 6(2)(d) the reference to “the net amount” of the profits of the branch or agency concerned, are references to the amount of that income, or of those profits, after deduction of expenses but before tax, as determined in accordance with a generally accepted method of accounting for profits of branches or profits of agencies of companies.
(7) In paragraph (1) of this regulation a “chargeable asset” is any asset in the case of which one of the following conditions is satisfied, that is to say–
(a)a gain accruing to the company on a disposal of that asset on or after the date of coming into force of these Regulations would, on the assumption that the company was within the charge to corporation tax, have fallen to be treated in relation to the company as a chargeable gain and would not have been taken into account as a receipt in computing the company’s income or profits or gains or losses for the purposes of the Income Tax Acts;
(b)a chargeable gain or allowable loss would, on the assumption mentioned in sub-paragraph (a), be deemed to have accrued to the company on any disposal of that asset on or after the date mentioned in that sub-paragraph.
(8) In paragraph (3)(b)(i) of this regulation–
“qualifying company”–
as respects a contract falling within section 126(1) of the Finance Act 1993, has the meaning given by section 152 of that Act(4);
as respects a contract falling within section 147(1) of the Finance Act 1994, has the meaning given by section 154 of that Act;
“qualifying contract” means a contract falling within section 126(1) of the Finance Act 1993 or section 147(1) of the Finance Act 1994, as the case may be, other than a contract which, in the case of branch or agency income or gains which would be income or gains falling within sub-paragraph (b) of regulation 5(3) if branch or agency income and gains fell within that sub-paragraph, is not entered into by the branch or agency concerned.
S C T Matheson
G H Bush
Two of the Commissioners of Inland Revenue
9th December 1998