In its pre-Budget report, the government announced it will be introducing an
exemption from tax for most foreign dividends received in the UK by large- and
medium-sized groups. This will be included in the finance bill 2009 and is aimed
at increasing the tax competitiveness of the UK. Draft legislation was due to be
published in December.
Coupled with the substantial shareholdings exemption, no withholding tax on
dividends and one of the widest treaty networks, the proposals on the face of it
increase the attractiveness of the UK for international groups, says accounting
firm Mazars. However, it adds, the new rules only apply to large- and
medium-sized groups, so unless some form of opt-in is available, smaller
multinational groups might be at a disadvantage.
Among the key changes are:
• The existing controlled foreign company (CFC) rules will be reformed, but it
looks as if the rules will continue to tax foreign entities as opposed to
• Owing to the complexities involved in striking a balance between protecting
revenue in the UK and reflecting modern business practices, the overall reform
of the CFC rules is not expected until at least finance bill 2011. However,
there will be some more immediate changes in finance bill 2009.
• The holding company exemptions in the exempt activities test are to be
repealed with a 24-month transitional period. It is unclear at this stage how
this change will impact on existing group structures where local holding
companies in foreign jurisdictions are often used to provide finance for the
subsidiaries in that territory.
• The acceptable distribution policy (ADP) rules will be repealed. A CFC can
currently avoid having its profits apportioned to the UK company which owns it
by paying an ADP instead.
• The current exclusion of chargeable gains from the CFC regime may well
continue, but this is yet to be confirmed.
In addition, there will be a strengthening of the existing “unallowable purpose”
rule for loan relationships and derivatives to cover schemes and arrangements to
clamp down on what the government perceives to be unacceptable tax avoidance.
The government’s changes to the tax regime have been broadly welcomed by
accountants. Bill Dodwell, head of tax policy at Deloitte, says, “the Chancellor
has accepted that it is appropriate to move UK taxation onto a territorial
system that is, only taxing UK source profits. It is thought that it may take
up to two years before the new system is legislated.
“This is a good result for the consultative process, set in train in July
2008. The plan to move UK taxation onto a territorial basis will help make our
tax system attractive to UK-headquartered groups. However, while we accept there
is an economic case for restricting interest deductions, we are concerned that
this proposal is complex and will prove unfair in some cases. We hope that
further debate will lead to changes.”
For Mazars’ views, see