Finance Act 1996

Section 182.

SCHEDULE 36 Controlled foreign companies

1 (1) Section 747A of the Taxes Act 1988 (special rule for computing chargeable profits: currency) shall be amended as follows.

(2) Subsection (7) (first relevant accounting period of a trading company where subsection (6) does not apply) shall be omitted.

(3) In subsection (8) (first relevant accounting period of a company which is not a trading company)—

(a) the words “the company is not a trading company and” shall be omitted;

(b) for “its”, where first occurring, there shall be substituted “the company's”; and

(c) after paragraph (b) (cases where direction under section 747 would have been given had the company not pursued an acceptable distribution policy) there shall be added—

“unless the company is a trading company, in which case paragraph (b) above shall be disregarded in the case of its accounting periods beginning before 28th November 1995.”

2 In section 748(3) of the Taxes Act 1988 (direction under section 747(1) not to be given in cases where reduction in United Kingdom tax was not the main purpose etc) in paragraph (a), for “or any two or more of those transactions taken together” there shall be substituted “or any two or more transactions taken together, the results of at least one of which are so reflected,”.

3 (1) Schedule 24 to the Taxes Act 1988 (assumptions for calculating chargeable profits etc) shall be amended in accordance with the following provisions of this paragraph.

(2) In paragraph 1 (general) after sub-paragraph (3) there shall be inserted—

“(3A) In any case where—

(a) it is at any time necessary for any purpose of Chapter IV of Part XVII to determine the chargeable profits of the company for an accounting period, and

(b) at that time—

(i) no direction has been given under section 747(1) with respect to that or any earlier accounting period of the company, and

(ii) it has not been established that that or any earlier accounting period of the company is an ADP exempt period,

in determining the chargeable profits of the company for the accounting period mentioned in paragraph (a) above it shall be assumed, for the purpose of any of the following provisions of this Schedule which refer to the first accounting period in respect of which a direction is given under section 747(1) or which is an ADP exempt period, that that period (but not any earlier period) is an accounting period in respect of which such a direction is given or which is an ADP exempt period.”

(3) After sub-paragraph (5) of that paragraph there shall be inserted—

“(6) Any reference in this Schedule to an “ADP exempt period”, in the case of any company, is a reference to an accounting period of the company—

(a) which begins on or after 28th November 1995; and

(b) in respect of which the company pursued, within the meaning of Part I of Schedule 25, an acceptable distribution policy.”

(4) In paragraph 2(1) (company assumed to have become resident in the United Kingdom at the beginning of the first accounting period in respect of which a direction is given under section 747(1) and to have continued so resident etc) for “in respect of which a direction is given under section 747(1) and” there shall be substituted—

“(a) in respect of which a direction is given under section 747(1), or

(b) which is an ADP exempt period,

and”.

(5) In paragraph 4 (maximum reliefs assumed to have been claimed etc unless notice requesting other treatment is given by UK resident company or companies with a majority interest) after sub-paragraph (1) there shall be inserted—

“(1A) Sub-paragraph (2) below applies to any accounting period of the company—

(a) in respect of which a direction is given under section 747(1); or

(b) which is an ADP exempt period.”

(6) In sub-paragraph (2) of that paragraph (notice to be given not later than the expiry of the time for making an appeal under s.753 or within such longer period as the Board may allow)—

(a) at the beginning there shall be inserted “Where this sub-paragraph applies to an accounting period of the company, then”; and

(b) for “the time for the making of an appeal under section 753” there shall be substituted “the appropriate period”.

(7) After that sub-paragraph there shall be inserted—

“(2A) For the purposes of sub-paragraph (2) above, “the appropriate period”—

(a) in the case of an accounting period in respect of which a direction is given under section 747(1), means the time for the making of an appeal under section 753; and

(b) in the case of an accounting period which is an ADP exempt period, means the period of twenty months following the end of the accounting period.”

(8) After sub-paragraph (3) of that paragraph (which defines the UK resident company or companies with a majority interest) there shall be inserted—

“(3A) Sub-paragraph (3) above shall apply in relation to an accounting period which is an ADP exempt period as it would apply if—

(a) that accounting period had instead been one in respect of which a direction had been duly given under section 747(1), and

(b) such apportionments and assessments as are mentioned in sub-paragraph (3) above had been made.”

(9) In paragraph 9(1)(c) (losses incurred in accounting periods in which, among other things, the company was not resident in the United Kingdom) after “was not resident” there shall be inserted “, and is not to be assumed by virtue of paragraph 2(1)(b) above to have been resident,”.

(10) In paragraph 10 (capital allowances for expenditure incurred on machinery or plant before the first accounting period in respect of which a direction is given under section 747(1)) for “in respect of which a direction is given under section 747(1), the” there shall be substituted—

“(a) in respect of which a direction is given under section 747(1), or

(b) which is an ADP exempt period,

the”.

(11) In paragraph 11 (write-down of allowances for certain years preceding the first for which a direction is given under section 747(1)) in sub-paragraph (2) (which defines the starting period as the first accounting period for which a direction is given and makes provision in respect of claims under paragraph 9(3)) for “in respect of which a direction is given under section 747(1) and” there shall be substituted—

“(a) in respect of which a direction is given under section 747(1), or

(b) which is an ADP exempt period,

and”.

4 (1) Schedule 25 to the Taxes Act 1988 (cases excluded from direction-making powers) shall be amended as follows.

(2) In paragraph 2 (acceptable distribution policy)—

(a) in sub-paragraph (1)(d) (amount of the dividend etc paid to persons resident in the United Kingdom) for “50 per cent. of the company’s available profits” there shall be substituted “90 per cent. of the company’s net chargeable profits”;

(b) in sub-paragraph (6) (computation of appropriate portion of profits in cases where there are two classes of issued shares) in the definition of “X”, for “available profits” there shall be substituted “net chargeable profits”.

(3) In paragraph 2A (further provisions to determine whether a controlled foreign company which is not a trading company pursues an acceptable distribution policy)—

(a) in sub-paragraph (1) (application) the words “which is not a trading company” shall be omitted;

(b) in sub-paragraph (5)(c) (which modifies the definition of “X” in paragraph 2(6) for certain purposes) for “available profits” there shall be substituted “net chargeable profits”;

(c) sub-paragraphs (6) and (7) (which are superseded by amendments made to paragraph 2 by this Schedule) shall be omitted.

(4) In paragraph 3 (“available profits” and “net chargeable profits” for purposes of Part I of the Schedule)—

(a) sub-paragraphs (1) to (4) (ascertainment of “available profits”) shall be omitted;

(b) in sub-paragraph (5) (certain dividends to be left out of account in determining available profits or, where the company is not a trading company, chargeable profits) the words “the available profits or, where the company is not a trading company,” shall be omitted.

(5) In paragraph 6 (exempt activities) in sub-paragraph (2)(b) (less than 50 per cent. of gross trading receipts from wholesale, distributive or financial business to be derived from connected or associated persons) after “connected or associated persons” there shall be added “or persons who have an interest in the company at any time during that accounting period.”

(6) In paragraph 16(2) (reductions in United Kingdom tax: extended meaning of “transaction” in paragraphs 17 and 18)—

(a) in paragraph (a), after “transaction” there shall be inserted “the results of which are”; and

(b) in paragraph (b), for “two or more such transactions taken together” there shall be substituted “two or more transactions taken together, the results of at least one of which are so reflected”.