Worldwide debt cap and CFC changes – anti-avoidance

Mark Joscelyne, Tax Partner, CMS

Among the anti-avoidance measures announced today were two announcements affecting multinational groups.

Worldwide debt cap

There will be a widening of the definition of group for the purpose of the worldwide debt cap (“WWDC”).  The purpose is to ensure that groups cannot avoid or mitigate the application of the cap by including entities in the structure that do not have ordinary share capital . The change has effect for accounting periods starting on or after 5 December 2013.

The WWDC is intended to prevent multinational groups claiming excessive financing deductions in the UK.  Broadly, it imposes limitations on the deductibility of interest and similar expenses in the UK where the combined funding expenses of the UK members of a group exceed the consolidated funding expenses of the group.  Under current law, a company can only be a “relevant subsidiary”, and part of the group for WWDC purposes,  if it has share capital as one of the criteria for grouping is ownership of 75% or more of the company’s ordinary share capital.  So, entities such as companies limited by guarantee may are technically fall outside the group for WWDC purposes, despite forming part of the group for economic and accounting purposes.

The changes will put beyond doubt that entities without share capital will be capable of forming part of a group for WWDC purposes. It seems this will be the case even if they are not bodies corporate, such as trusts and other arrangements including partnerships. Grouping will be determined by reference to a “corresponding ordinary holding” which conveys rights corresponding to those conveyed by a holding of ordinary shares without regard to the legal form of the holding.

The rationale for this change is understandable from an anti-avoidance point of view but the application to such a wide range of arrangements could result in increased uncertainty in an area of taxation which is already complex.


Controlled foreign companies

One of the  attractive features of the new CFC regime is the reduced rate of taxation on the profits of group treasury companies.  However,  HM Treasury is concerned that this may be subject to abuse by groups artificially shifting existing UK loan income to offshore group members.  Certain changes are to be made to the CFC rules in order to prevent arrangements being put in place for the profits from intra-group loans to be effectively transferred to a controlled foreign company and benefit from the partial exemption for qualifying loan relationships, which would see these profits only subject to corporation tax at a quarter of the rate they would otherwise have been subject to in the UK.




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