GIM11100 - Captive insurers: controlled foreign companies: funded accounting: special tax rules: returns and dividends

Maximum four year funded accounting – section 755B(4A) ICTA

If the captive’s accounts are signed off later than three years following the end of the underwriting year, the technical provision is deemed to be replaced at the end of the third year following the end of the underwriting year (ICTA88/S755B (4A)). In effect therefore, for the purposes of the CFC rules, four-year funded accounting is the maximum permitted (as is the case for a UK insurer), and the parent’s CTSA return must me made on this basis.

Enhancement of dividends – paragraph 2 Schedule 25 ICTA

The rules in ICTA88/SCH25/PARA2 on ADPs are amended where they apply to the amount of the dividend paid by a captive using funded accounting. The dividend must be paid within 18 months of the date of the replacement of the technical provision, i.e. the date the accounts are signed off. Dividends paid later than 18 months after the end of the CFC’s accounting period must be “enhanced” by an interest factor. Details of the formula are in INTM213090.

Time limits for enquiries, returns and payment of dividends

Where a CFC uses funded accounting, a number of permutations relating to enquiries, the amendment of returns and the payment of dividends need to be considered.

• The UK company must submit its return on the basis that the company in which it holds the relevant interest either is, or is not, subject to the CFC rules. In most cases a company will submit its UK return on the basis that its CFC will follow an ADP, and the CFC will actually do so ( GIM11110).
• However, the circumstances of the CFC may change. In particular the UK company may not be certain whether or not the CFC is subject to a lower level of taxation in its territory of residence. This will be so where the CFC’s fund has not closed when the UK company’s return is filed (as will normally be the case), because if for the underwriting year the captive has made a loss, the corresponding UK tax will be nil – section 750(2) ICTA. Therefore even if the territory in which the CFC is resident has a zero tax rate, the captive will not be subject to a lower level of tax. ( GIM11120).
• The CFC may fail to follow an ADP within the time limit ( GIM11130).