UK Controlled Foreign Company Reform: Draft Legislation on Permanent Changes to the CFC Rules

Sullivan & Cromwell LLP - January 5, 2012

The UK government has now published draft legislation for a reformed controlled foreign company (“CFC”) code. The legislation sets out the framework for a new regime in detail, although the government has yet to provide drafting in some areas and is still consulting on several issues. The new code would be more sophisticated than the old, but at a cost in complication. The government is looking to bring in the new rules from mid- to late- 2012.

What’s new?

  • The new rules are significantly more complex than either the current regime or the regime proposed in the consultation document of June 2011
  • Targeted anti-avoidance rules have proliferated
  • The definition of “control” has been extended
  • Most limitations are now partial, rather than covering all the CFC’s income
  • Only specified income streams will be included in “chargeable profits”, depending on whether one of seven grounds for inclusion is met and whether a relevant exclusion applies
  • Property rental is fully excluded
  • The government has decided how the finance company partial exemption should work – though it is still considering whether it should be more generous in some cases