UK Controlled Foreign Company Reform: Consultation Document on Permanent Changes to the Controlled Foreign Company Rules

Sullivan & Cromwell LLP - September 6, 2011

On 30 June 2011 HM Treasury and the UK tax authorities, HM Revenue and Customs, issued a further consultation document as the next stage in the process of reforming the UK’s controlled foreign company (“CFC”) rules. The consultation document sets out the framework for a new regime in quite some detail, although many points remain open. While still complicated, the regime as proposed improves on the current one in several respects. The government is looking to bring in the new rules from mid- to late- 2012.

What’s new?

  • The definition of “control” is now in play
  • Most exemptions are now partial, rather than covering all the CFC’s income
  • The “exempt activities” test and the “limited UK connection” exemptions brought in by the Finance Act 2011 have been remodelled
  • Overseas property rental and big-ticket operating leases are no longer classed as “investment”, which represents a relaxation of the previous position
  • There is more detail on the finance company partial exemption – and the government is considering a full exemption for some cases
  • A general purpose exemption will replace the much-criticised motive test