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Loophole Closed in UK CFC Anti-Avoidance Rules

Tax-news.com

01 May 1999


The UK (Budget) 1999 Finance Bill (Clause 79) closes a loophole in the anti-avoidance rules for controlled foreign companies (CFCs). The income of a CFC (one controlled by UK residents) will be taxable if the income of the CFC is taxed locally at less than 22.5% based on UK tax principles. The income of the CFC escapes this charge if it pursues an Acceptable Distribution Policy (ADP) by paying to UK residents at least 90% of the profits which would have been taxable according to UK principles, had the CFC been in the UK. The loophole allowed UK companies to route dividends via a CFC, escaping the CFC tax charge because the 90% rule was satisfied. In future, dividends paid by a CFC to UK residents will only count towards the 90% rule if they would have been taxable if paid in the UK (they wouldn't, because dividends paid between two UK companies are not taxable).

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