International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Update on new UK CFC rules

The new UK controlled foreign company (CFC) rules are due to come into effect for accounting periods starting on or after January 1 2013. Lorna Smith and Liz Hughes of Grant Thornton UK emphasise the importance of assessing significant people functions (SPF).

The new rules were originally published in December 2011 however there has recently been additional guidance issued by HM Revenue & Customs (HMRC). As the new rules represent a significant change in approach, HMRC is holding a series of road shows during the autumn on the new CFC regime and the patent box. The road shows will be attended by HMRC's customer relationship managers and tax specialists.

In our earlier article, we introduced some important concepts that will be familiar to transfer pricing practitioners.

For example, some taxpayers may be required to identify whether there are any SPFs carried out in the UK in relation to the business of the CFC. This concept was first introduced in the OECD 2010 Report on the Attribution of Profits to Permanent Establishments.

SPFs are not defined further within the CFC legislation and so reliance will be placed on the definitions in the 2010 report.

Broadly, under the new rules, any non-UK resident company that is controlled by a UK company will be a CFC. Although there are a number of exemptions that may apply, if there are any SPFs that are carried out in the UK, which relate to the business carried out by the CFC, it may be necessary to treat the SPF of the CFC as if it is a UK branch of the CFC and attribute profits of the CFC to the branch.

Hence, the importance of the OECD report: firstly in determining what is an SPF and then how to attribute profits to the hypothesised branch. However, where the activities in the UK are already remunerated on an arm's-length basis, it is possible that no additional charge will arise.

SPFs are people who carry out fundamental business functions that lead to the assumption of risk, the ownership of assets or the on-going management of those assets and risks.

The first step in this process is to determine what are the key functions and risks in the business. What constitutes a key function or risk may be different depending on the business involved. For example, for companies in the pharmaceutical industry, research and development (R&D) may be important, whilst for fast moving consumables, marketing and brand development may be vital.

Once the key assets and risks have been identified, work needs to be performed to identify who performs those key functions, undertakes activities that lead to the assumption of risk, or manages those assets and risks.

Those people may not be the most senior or well paid in the organisation. They should, however, be the people that make active decisions regarding those assets and risks.

For example, in the pharmaceutical company it may be the person who decides whether to abort a project or to extend further funding to it, or interprets the results of the research.

This may not be the same person who is responsible for R&D at board level, nor the person who works in the laboratory performing the R&D.

To identify SPFs, and in particular if there is a UK-based SPF, a functional and factual analysis of the UK company and the CFC should be carried out.

In considering the application of the new CFC rules in a group, an important information source will be the group's transfer pricing documentation, which should already include such functional analysis, although it may require supplementing to analyse the issue in the particular circumstances of the CFC.

Grant Thornton UK held a client webinar on 18 September 2012 at which Liz Hughes, a Director in the Transfer Pricing team, outlined the SPF concept as it applies to CFCs.

more across site & bottom lb ros

More from across our site

ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.
Karl Berlin talks to Josh White about meeting the Fair Tax standard, the changing burden of country-by-country reporting, and how windfall taxes may hit renewable energy.
Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.