| UK Corporate
Taxation for Multinationals
Taxation for Resident Multinationals
If a multinational
corporation (meaning, a company with subsidiaries or affiliates
in more than just one or two countries) needs to be based
in a high-tax country, for instance because it must have a
listing on a major stock exchange, then the UK is often a
good choice. As a member state of the EU, the UK is within
the EU parent-subsidiary directive, and in addition the UK
has a very broad network of double tax treaties, so that it
is well-placed to receive dividend income with the lowest
possible amount of foreign tax deduction.
this advantage has been somewhat compromised by measures in
successive Finance Acts to limit international tax planning
the UK's Controlled Foreign Company rules have been tightened
to the point at which only marginal benefits can be obtained
by locating a subsidiary in a low-tax jurisdiction. In addition,
enabling legislation in the 2002 Finance Act allowed the British
government to alter the tax treatment of controlled foreign
companies in jurisdictions which were considered to allow
'harmful tax practices'.
the use of tax 'mixing' intermediate companies in such jurisdictions
as Holland and Denmark was severely pruned back by the Finance
Act 2000. Whereas it used to be possible to use, say, a Dutch
holding company to mix dividends from foreign subsidiaries
taxed at say 10% and 50% to achieve a blended rate of 30%,
thus ensuring that only a very small amount of UK corporation
tax would be payable, the rules were changed.
that should be noted, however, was the abolition of the ACT
(Advance Corporation Tax) withholding tax in 1998: although
corporation tax is now payable earlier than before, the problem
of excess ACT has disappeared.
to both resident and non-resident shareholders are paid without
deduction of withholding tax.
improvement, contained in the 2001 budget, was the abolition
of withholding tax on interest and royalty payments to companies
subject to UK corporation tax.
Brown announced the extension of the abolition of withholding
tax on international bonds and intra-UK payments of interest
and royalties, to include non-bank entities, such as venture
this announcement was welcomed by British industry, there
was disappointment that the change was not more far-reaching.
The Chartered Institute of Taxation made the following suggestion
for further reform:
are disappointed that this will only apply where the recipient
company is within the charge to UK corporation tax. Gross
rental income may be received by non-resident landlords who
have undertaken to comply with UK tax obligations, and we
would suggest that consideration be given to the introduction
of such a scheme for the receipt of interest and royalty payments
by those outside the charge to UK corporation tax."
further improvements to the withholding tax regime were included
in the 2002 Finance Act
result of the accumulation of negative measures imposed by
the Treasury, it was reported in December, 2004, that leading
tax advisers and accountancy firms such as PricewaterhouseCoopers
and KPMG were advising their international clients to avoid
establishing operations in the United Kingdom.
development for existing UK-based multinationals was (and
is) the gung-ho attitude of the European Court of Justice,
which is rapidly tearing down national fiscal barriers inside
the EU. In 2002 it ruled against fiscal exit penalties on
preliminary hearing of the Conseil d'Etat v de Lasteyrie du
Saillant case, the ECJ's Advocate General decided that the
French government had violated the freedom of establishment
provisions contained within EU law by levying a punitive residential
exit tax on an individual who wanted to transfer his tax residence
out of France.
of the EU's member countries impose company emigration exit
charges. They include the UK, France, Germany, Italy and Spain.
The huge tax penalties act as a deterrent on companies wanting
to relocate to other member states where running costs are
vary from country to country, but most countries, including
the UK, levy a penalty of about 30% of the value of a company's
capital assets. Individuals must often pay up to 40%. These
have, however, come under attack from the European Commission,
which considers such taxes in breach of EU freedom of establishment
has ruled against national governments in a number of cases
involving freedom of establishment, and in August 2003 the
English High Court followed ECJ precedents in a test case
brought by Deutsche Morgan Grenfell, concerning EU 'freedom
of establishment' and anti-discrimination laws.
Park's decision in the High Court was the conclusion of a
case first initiated when 50 companies submitted a group claim
in the English courts as the result of an European Court of
Justice precedent which ruled that the British government
had illegally imposed advance corporation tax.
the rules which applied until the 2001 and 2002 reforms of
corporation tax, UK subsidiaries of European firms were wrongly
made to pay tax on dividends repatriated to their continental
tax law in this area has since changed (as mentioned above),
the UK investment banking arm of the German bank was attempting
to establish how far claims of wrongly paid tax can be backdated.
Revenue (now HMRC) argued that the claims are restricted to
a six year period by the 1980 Limitation Act. However, Justice
Parks ruled otherwise, announcing that such claims were not
time-barred by the 1980 Act.
he added that: "This is not a result which I reach with much
blow for national treasuries came in September 2004 when the
ECJ ruled that the Netherlands' domestic tax law on 'exempt
participations' was discriminatory and as a consequence, unlawful.
ruling related to a case involving Bosal Holdings, a Dutch
manufacturer of car exhausts which acquired a number of European
firms during the 1990s, and was prevented from claiming tax
relief for interest paid on borrowings financing subsidiaries
which did not generate income taxable in Holland.
found that this breached Bosal's fundamental 'freedom of establishment'
rights, laid down in the founding Treaty of Rome, and therefore
upheld its claim against the Dutch government.
decision was expected to benefit many firms elsewhere in the
union which had similar claims pending against national governments.
company was UK retail firm Marks and Spencer. M&S argued that
under Article 43 of the European Union Treaty, it should be
allowed to offset losses of around 160 million euros made
by its French, Belgian, and German subsidiaries between 1997
and 2001 against UK profits, claiming a tax refund of GBP30
2005 came the initial result of the much-followed Marks and
Spencer case, in which Advocate General Mr Poiares Maduro
agreed with the company. European Union finance ministers
however vowed to find a "defence mechanism" to counter the
likelihood of tax revenue shortfalls should the British retailer
ultimately be successful in its legal bid to offset losses
made by foreign subsidiaries against tax.
formed one of the main talking points during an Ecofin meeting
of EU finance ministers. "There is great concern about this,"
remarked Jeannot Krecke, Economy Minister of Luxembourg, which
was holder of the rotating EU presidency at that time.
General's opinion was supported later that year by the full
regard to CFCs, further changes were brought forward in the
2005 budget. The 2005 Controlled Foreign Companies (Excluded
Countries) (Amendment) Regulations aimed to prevent CFCs from
manipulating their profit location in order to evade taxes,
to stop them from secreting income in non-corporate entities,
and to exclude them from receiving the benefits of the CFC
regime if they are not liable for tax in another country.
The measures came into full force on March 31st.
for the Inland Revenue (as HM Revenue & Customs was known
at the time) explained that: "All of the changes made are
a reaction to schemes including some that were identified
via the disclosure rules. The government could not have allowed
significant amounts of tax to remain at risk."
2006 HM Revenue and Customs won an important legal battle
when the House of Lords ruled that companies which claimed
a tax credit on a dividend paid to a foreign parent cannot
claim a refund of advanced corporation tax.
litigation was brought by more than 60 companies and led by
Pirelli, the Italian tyre manufacturer, which claimed that
the obligation to pay advance corporation tax (ACT) in the
UK on dividends it paid to its Dutch parent was in breach
of European Union law concerning taxes levied on dividends.
the Dutch parent had received a repayment of 50% of the tax
credit attached to the dividend under the tax treaty between
the UK and the Netherlands, it claimed that the parent's right
to receive the credit was legally separate from any obligation
of the subsidiary to pay ACT.
in overturning judgments by the High Court and the Court of
Appeal, Lord Nicholls, one of the five judges on the panel,
said that Pirelli was looking to obtain "the best of both
2006, the ECJ seemed set to confirm the House of Lords ruling,
when Advocate General Leendert Geelhoed stated that whilst
the UK tax authorities were required to treat non-UK firms
fairly, there was no pre-requisite for equal treatment.
the UK was entitled to enter into different tax treaties with
different countries and did not need to offer the same benefits
to everyone. In his opinion, Mr Geelhoed noted that this was
an area where "predictability and legal certainty are crucially
important, so that Member States can plan their budgets and
design their corporate tax systems on the basis of relatively
reliable revenue predictions.”
up on the M & S case, the United Kingdom government announced
in February, 2006, that it would introduce legislation in
the Finance Bill 2006 to amend the UK loss relief rules.
to the UK government, the ECJ considered that the country's
group loss relief rules are in principle compatible with European
law, meaning that the system of group relief can be kept broadly
as it is now, although the Court also held that, in some very
limited circumstances, relief should be available in the UK
for the otherwise unrelievable losses of some group companies
resident in other States.
the government fears that groups with loss-making companies
resident in another state could "engineer" their circumstances
so as to preclude the possibility of a loss making company
obtaining relief in its state of residence by, for example,
liquidating that company whilst transferring its business
to another company.
the government introduced legislation to deny loss relief
where there are arrangements which either: result in losses
becoming unrelievable outside the UK that were otherwise relievable,
or; give rise to unrelievable losses which would not have
arisen but for the availability of relief in the UK, if the
main purpose or one of the main purposes of those arrangements
is to obtain UK relief.
was to be effective from Monday, February 20 of that year.
in April, 2006, the European Court of Justice Advocate General,
Leendert Adrie Geelhoed, gave an opinion in favour of four
UK companies who had claimed that corporation tax charged
on dividends received from EU subsidiaries was illegal under
EU free movement of capital rules.Between 1973 and 1999, when
the UK scrapped its Advanced Corporation Tax system, which
allowed UK companies to pay up dividends domestically at a
favourable rate, dividends from non-UK EU subsidiaries of
UK companies were charged at higher rates.
the four companies in the case, British American Tobacco,
British Petroleum, Aegis Group and Imperial Chemical Industries,
were claiming refunds of 'only' some hundreds of millions
of pounds, the UK government warned during court proceedings
that the total cost of an adverse ruling might be as high
GBP7 billion if many companies applied for refunds, and that
the ECJ should therefore reject the companies' case on the
grounds that the UK's financial stability could be affected.
denied this reasoning.
2006, the European Court of Justice followed his opinion,
and ruled that ACT operated illegally between 1973, when the
UK acceded to the EU, and 1999, giving rise to the prospect
of substantial rebates to companies which have paid this tax
in the past.
warned that such a ruling could leave it open to repay claims
totalling GBP9 billion, although draft blocking legislation
which would limit a company's claims to six years would reduce
this to about GBP2 billion, the government has estimated.
principle, today’s decision is good news for companies
hoping for an ACT rebate. However, they are unlikely to receive
anything until the UK and European courts reach a decision
as to the legal status of the blocking legislation –
a process that is likely to take some time," observed
Jonathan Bridges of KPMG’s EU law group at the time.
referred the matter back to the UK courts to determine whether
the UK rules operate to achieve this parity.
is disappointing that the ECJ has stopped short of ruling
that the UK should apply the same rules to both UK and foreign
sourced dividends," Bridges noted.
“Achieving equality of treatment via a credit system
may, on the face of it, sound reasonable but it is not straightforward."
ECJ’s ruling today fails to fully appreciate the fact
that not all profits in the UK are taxed at the corporate
tax rate of 30%. For example those deriving from share sales
are completely exempt."
today’s ruling does is potentially introduce yet another
layer of complexity into the UK’s already overly cumbersome
corporate tax system.”
Finance Bill implemented changes to the Controlled Foreign
Company regime made in response to the previous year's high-profile
Cadbury-Schweppes decision by the European Court of Justice.
CFCs were not mentioned in the Chancellor's March Budget speech,
the Treasury released a detailed response to the ECJ's decision,
which commentators said represented the minimum that the Government
could have done to comply with Cadbury.
provisions restricted the application of CFC rules to profits
arising from the activities of employees but not of capital,
meaning that they will only become significant in respect
of trading operations in a 'low-tax' EU or EEA territory.
The ECJ did not make such a distinction. To the disappointment
of many tax advisers, the Treasury did not provide for an
advance clearance mechanism for the CFC regime. In addition,
the Treasury stiffened the effective management test, making
it more difficult for EEA-based companies to satisfy the Exempt
in July 2008, it emerged that Vodafone had won a key legal
battle against the UK tax authority in a judgment that cast
major doubt on the compatibility of the UK's controlled foreign
companies (CFC) regime with European Union law.
Edward Evans-Lombe ruled in the High Court on 4th July that
Vodafone does not have to pay UK corporation tax on income
attributed to its Luxembourg holding company Vodafone Investments
Luxembourg Sarl (VIL). Consequently, he ordered HMRC to shut
an ongoing tax inquiry into Vodafone's tax for the year to
estimated that the court victory has saved it more than GBP2bn
(USD4bn) in tax and interest that it might have been ordered
to pay had the judgment gone against the company.
the ruling also had ramifications that go much wider than
Vodafone's corporate arrangements, and several UK-based multinationals
with subsidiaries in favourable EU tax jurisdictions such
as Ireland, Luxembourg and the Netherlands, who are said to
be under a similar type of scrutiny from HMRC, are likely
to be breathing a sigh of relief as a result.
dates back to 2002 after Vodafone set up VIL to dispose of
its shares in the German telecommunications group Mannesman,
which it acquired in 2000. VIL is also used to circulate cash
and profits around the group and as a vehicle to fund other
argued that under the UK CFC rules, it had the right to tax
the difference between rate a subsidiary pays in a low tax
jurisdiction overseas and the rate it would have paid on that
income in the UK - a principle that it attempted to apply
in the Vodafone case.
Justice Evans-Lombe referred back to a precedent set in 2006
by the European Court of Justice (ECJ) in the case involving
Cadbury-Scweppes, which said that the UK CFC rules were incompatible
with EU law because they were too restrictive and should only
be applied in cases where companies set up artificial arrangements
aimed solely at avoiding tax.
the UK Treasury moved to amend CFC regulations in the wake
of the Cadbury-Schweppes ruling, Justice Evans-Lombe argued
that these amendments had not gone far enough to address their
incompatibility with EU law, and he urged the government to
revisit the legislation.
my judgement, the CFC legislation must be disapplied so that,
pending amending legislation or executive action, no charge
can be imposed on a company such as Vodafone under the CFC
legislation," he said, going on to add that:
seems to me that all UK taxpayers, including Vodafone, were
and are entitled to be told by legislation, of which the meaning
is plain, what the tax consequences for them will be if they
decide to incorporate a controlled foreign company in a (EU)
government was in the process of reviewing its stance on the
taxation of multinationals' international income at the time
of the July ruling, but tax experts said that the latest judgment
had thrown the situation into chaos, and may have left the
UK with a completely unenforceable set of CFC legislation.
High Court has expressed ‘some doubt’ as to the
efficacy of sticking plaster amendments introduced in 2006,”
Mark Persoff of Clifford Chance, the legal firm was quoted
as saying by the Financial Times. “This means, as matters
now stand, the UK probably has no enforceable CFC legislation
so far as EU/EEA subsidiaries are concerned.”
Cussons, a tax partner at PriceWaterhouseCoopers, described
the ruling as a "blockbuster judgement."
is big news because there are thousands of UK companies with
foreign subsidiaries in the European Union," he told
the Telegraph. "There will have been CFC tax paid over
the years, hundreds of millions of pounds per annum, and potentially,
upon claims being made, all that tax is up for grabs,"
suffered a court setback in May 2009 in its bid to avoid the
UK back tax bill in relation to VIL when the Court of Appeal
ruling overturned the 2008 decision by the High Court that
Vodafone does not have to pay UK corporation tax on income
attributed to its Luxembourg holding company.
of Appeal decided that the UK’s CFC law should be interpreted
as if it had a new exception for companies established in
the European Economic Area (EEA) which carry on ‘genuine
economic activities’ there. This means that the CFC
rules will still apply to companies operating outside the
EEA and also to EEA companies without genuine economic activities.
meant that HM Revenue and Customs could reopen its inquiry
into Vodafone’s tax arrangements for the year to March
Supreme Court, which replaced the House of Lords as the country's
highest court in 2009, refused to hear the company's appeal
fo the Court of Appeal ruling.
to law firm McGrigors, the Supreme Court's decision to throw
out the case was unexpected, as most tax specialists had anticipated
that, given the potential ramifications of the case, the Supreme
Court would review the matter.
shows that the Supreme Court will not hear cases simply because
of the amounts at stake," observed Rupert Shiers, a partner
added that Vodafone had won a "convincing" victory
in the High Court in 2008 and can be "entitled to be
surprised and very disappointed not to be allowed their day
will see this as a major victory," he noted. "They
were shocked to hear people arguing that once the ECJ intervenes
to say that a piece of legislation is not quite right, the
whole legislation is poisoned and it simply falls away. The
courts have now said very clearly that you should just cut
out the infection and leave the healthy parts intact.”
Profits And CFC Reforms
Act 2009 foreign profits package was expected to be implemented
during 2009 and included:
dividend exemption for most foreign dividends irrespective
of the level of shareholding
cap, a comparison of a UK tax group’s gross intra-group
finance expense with the global group’s net finance
expense after excluding gross external finance expense of
the UK tax group, with some corresponding UK taxable income
para 13 looks to whether any group company, and not just
the borrower, is part of arrangements whereby there are
increased debits or reduced credits, and is currently very
company regime to be modified to remove the ADP exemption
and holding company tests, with a further review after Budget
consent to be repealed and replaced by a retrospective quarterly
2009, Stephen Timms, Financial Secretary to the Treasury,
announced that the government had amended its proposed changes
to the taxation of foreign profits in an effort to simplify
circulated by Timms on April 30 explained that changes to
the debt cap element of the reforms would be inserted into
the 2009 Finance Bill, which was published on the same day,
following discussions with business.
legislation in the bill has been subject to extensive consultation
over the past year, and we have worked to ensure the responses
are accommodated, where possible, and the bill is as complete
as it can be,” Timms wrote.
original form, Clause 34 and Schedule 14 of the 2009 Finance
Bill determine the scope of the corporation tax charge on
both UK and foreign company distributions. According to the
relevant Budget Note, the result of the reforms, due for introduction
on July 1, 2009, will be that the great majority of distributions
will be exempt from corporation tax. The Schedule also contains
anti-avoidance rules to prevent abuse of distribution exemption.
35 and Schedule 15 of the Finance Bill make provision for
the restriction of the tax deduction available for finance
expenses of groups of companies (the 'debt cap'). The effect
of the new measure is to limit the aggregate UK tax deduction
for the UK members of a group of companies that have net finance
expenses to the consolidated gross finance expense of that
stated, however, that “a couple of areas” of the
proposed reforms “have given rise to significant comment.”
These include the exclusion for financial services and the
targeted anti-avoidance rule. “We plan further discussions
(on these two aspects of the reforms) before the final legislation
is published,” Timms explained.
are also points of detail relating mainly to further exclusions
and interaction with other parts of the tax code that have
not yet been reflected in the Bill because of time constraints,”
Timms continued. “Proposed amendments to be made during
the passage of the bill for these straightforward areas will
also be published on HMRC’s website.”
allowing groups to state they are satisfied that their tested
expense amount, if calculated, would be less than their
available amount for any particular period of account of
the worldwide group.
definition of the available amount will be amended to include
calculation of the UK measure and worldwide measure –
providing a method whereby the comparison is made using
the functional currency rather than sterling.
will be made to cater for exempt financing income received
by charities, non-departmental public bodies, educational
establishments, local authorities and health service bodies.
a company brings into account a loan relationship debit
on a paid basis, rules to disregard any amounts accrued
but unpaid for periods of accounts of the worldwide group
before the debt cap applies.
consequential amendment to Schedule 28AA to make clear that
this Schedule applies before the debt cap to any amount
of financing expense of financing income.
consequential amendment to ensure that profits of a controlled
foreign corporation apportioned to a UK group company are
not doubly taxed in respect of any finance expense amount
payable to that CFC.
2010, The UK government published a discussion document on
proposals for reforming the UK tax treatment of CFCs.
set out in the discussion document are intended to enhance
the competitiveness of the UK, while providing adequate protection
of the UK tax base. The discussion document sets out the overarching
framework of the new rules and proposals for how monetary
assets and intellectual property could be treated.
aim to address growing concern from business that the UK's
CFC rules are too complex and reverse a steady flow of companies
shifting their tax bases to jurisdictions considered to have
more business-friendly tax regimes such as Ireland, Luxembourg
attempt to achieve this, the discussion document sets out
proposals for a more targeted CFC regime to catch profits
being artificially diverted to low-tax jurisdictions, rather
than a "one size fits all" approach.
document also outlines possible approaches to reform the treatment
of intellectual property with the aim of more effectively
targeting situations "where there is a risk of erosion
of the UK tax base."
CFC rules generally target income from IP on the grounds that
it is passive income from a mobile asset. The government is
therefore concerned that there is a risk that UK tax can be
avoided through the artificial movement of intellectual property
(IP) into a low tax jurisdiction. Business, however, has emphasized
that many offshore IP companies undertake genuine and effective
management activity with the aim of maintaining or increasing
the value of their IP, and that a new CFC regime should reflect
the extent to which active management of IP takes place offshore.
for a new regime would be to identify companies that carry
on sufficient IP management activity offshore and to exempt
these companies from the CFC rules. However, the paper also
suggests that an additional tax charge be applied in certain
circumstances, for example where IP is transferred out of
the UK before its value can be accurately determined.
document also highlights the need for the new CFC rules to
interact efficiently with current UK transfer pricing rules,
and points out that the proposed "patent box" regime
announced in last month's pre-budget report, which will offer
a reduced rate of corporate tax on patent income, will have
a bearing on the reforms.
Secretary to the Treasury Stephen Timms said: “Modernizing
these rules is crucially important to maintaining and enhancing
the UK’s attractiveness as a base for global business.
This report, drawing on our discussions with businesses, is
a key step in designing a system that better recognizes the
way multinationals operate today, while protecting our tax
reform is the second part of the foreign profits package.
The first part was introduced in Finance Act 2009 and included
an exemption for foreign dividends and an interest restriction
period for this discussion document began on January 26 and
ran to April 20, 2010. The government released a further document
on the proposals along with draft legislation later in 2010.
Bill 2011 included interim improvements to the CFC rules,
exemption for certain intra group trading transactions;
exemption for CFCs with a main business of intellectual
property (IP) exploitation under certain conditions;
profits exemption of GBP200,000 as long as non-trading income
does not exceed GBP50,000;
- a statutory
three-year exemption for certain foreign subsidiaries.
further consultation, major changes to the CFC rules are expected
to be announced in the Finance Bill 2012 and to apply from
later in the year. The major points of the changes are:
exemption of overseas activities as long as the activities
are not designed to artificially reduce the UK tax base;
exemption for finance companies - up to three quarters of
finance profits to be exempt;
regime is to apply to foreign branches of UK companies and
gains, including property income, will be excluded;
profits exemption of GBP500,000 as long as non-trading income
does not exceed GBP50,000;
profit margin exemption if the adjusted accounting profits
are below 10%;
if the profits are derived in a territory where they will
be subject to at least 75% of UK tax.
The government has designed a
'gateway' to assist companies in establishing if the profits
from the foreign subsidiary fall outside the scope of the
CFC rules. The latest version of the gateway was published
on February 29, 2012, and can be found at: http://www.hm-treasury.gov.uk/controlled_foreign_companies.htm.