INTM201020 - Controlled Foreign Companies: legislation - introduction and outline

Nature of the Controlled Foreign Companies' rules

Part XVII of Chapter IV ICTA 1988 charges United Kingdom resident companies to tax in respect of the income of certain controlled foreign companies in which they have an interest. A controlled foreign company is an overseas company controlled by United Kingdom residents which pays less than three quarters of the tax which it would have paid on its income had it been resident in the United Kingdom. The controlled foreign companies' provisions are directed at companies which make use of low tax territories or other favourable overseas tax regimes to reduce their United Kingdom tax liabilities.

Before the introduction of self assessment for corporation tax, a direction from the Board of HM Revenue & Customs was needed to charge a UK company under Part XVII ICTA 1988 of Chapter IV in respect of the profits of a controlled foreign company. Under self assessment, companies are obliged to make their own assessment of any liability relating to controlled foreign companies as part of their tax return. The introduction of self assessment does not change the principles of Chapter IV. INTM215000 provides further guidance on the rules prior to self assessment.

FA98/S113 and FA98/SCH17 amend the legislation to bring it within self assessment. Under self assessment United Kingdom companies are required to self assess their Chapter IV liability. This requirement applies to United Kingdom companies for accounting periods ending on or after 1 July 1999, where:

• they have a relevant interest in a controlled foreign company, and
• the accounting period of that controlled foreign company ends within their own accounting period.

Example

A Ltd, a United Kingdom company has an accounting period beginning on 1 August 1998 and ending on 31 July 1999. A Ltd has a relevant interest in a controlled foreign company, B Ltd, whose accounting period ends on 31 August 1998. A Ltd is required to self assess any liability arising in respect of its interest in B Ltd in relation to B Ltd’s accounting period ended 31 August 1998 in its own return for the accounting period 31 July 1999.

For accounting periods of United Kingdom companies ending before 1 July 1999 the Board of HM Revenue & Customs must direct that the provisions of Chapter IV apply and no return of liability is required – see INTM215000.