UK Budget Closes CFC Loophole

Amanda Banks, Tax-news.com, London

09 March 2001

The Inland Revenue, as forecast in Chancellor Gordon Brown's Pre-Budget speech, has closed a loophole in the UK's Controlled Foreign Corporation tax laws. The legal loophole no longer exists with effect from Wednesday this week and will prevent, said the Revenue, a 'wholly artificial tax avoidance scheme'.

The laws governing CFCs, i.e. companies not resident in the UK but owned or controlled by individuals or companies that are UK-based, prevent UK companies from attempting to avoid UK tax on income that arises in or is diverted to subsidiaries located in low tax regimes.

CFC rules, which are very complex, contain a number of exemptions, including one called the 'acceptable distribution policy' exemption, which applies when a sufficient dividend is paid to UK shareholders.

For a number of years, it has been possible, in effect, to 'sell' a dividend to a bank, which would not be taxed on the whole dividend. Such dividends will, from 7 March 2001, no longer satisfy the ADP exemption.

A potential defect in the legislation that affects dividends that flow up through a chain of overseas companies has also been remedied. Advisers have been aware of this loophole for many years. However, the potential leakage might otherwise have increased under the revised CFC rules, which apply from 31 March 2001.

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