UK taxation - reforms relating to international aspects

The Finance Act 2009 which received Royal Assent on 21 July 2009 introduced a number of reforms to the international aspects of UK’s taxation.  We set out below the four main changes - these alter the landscape significantly.

The first is that the distinction in the corporation tax rules applying to UK and overseas source dividends has been abolished and has been brought within a single charging regime. A new corporation tax charge applies to UK and non-UK source dividends and other distributions (excluding capital distributions) paid on or after 1 July 2009 unless the distribution is exempt - the exemption is drafted extremely widely.  The effect of the new rules is to exempt all dividends from corporation tax unless they fall within certain anti-avoidance rules.  The changes are made by Schedule 14 to the Finance Act 2009, which introduces a new Part 9A into the Corporation Tax Act 2009 and makes various consequential changes for dividends and other distributions paid on or after 1 July 2009.  The practical impact of this change is that it makes the return of profits to the UK by way of dividends more attractive and decreases the compliance cost in claiming relief under the double taxation treaty. 

Secondly, it introduced a cap on the deductions on account of interest claimed by UK companies of a multinational group in calculating the UK companies’ corporation tax liability which is to be restricted by reference to the group's consolidated gross external finance costs.  The worldwide debt cap will apply to finance expenses payable in accounting periods beginning on or after 1 January 2010.  This rule is designed to discourage both upstream loans by overseas subsidiaries to UK parent companies and so-called "debt-dumping", that is structuring the UK group's interest liabilities as higher than the group's overall external interest liability, to take advantage of the UK's generous interest deduction rules.  The changes are made by Schedule 15 to the Finance Act 2009.  One effect of this rule will be to restrict UK tax relief for interest costs for groups with little external borrowing.  For those with external borrowing, an analysis will be required to ensure that the full amount of interest payable is deductible for the purposes of UK corporation tax, and if necessary, the debt re-structured. 

Thirdly, it changed the controlled foreign company rules as follows:

• the “acceptable distribution policy” exemption was repealed.  Broadly, the effect of this exemption used to be that there was no controlled foreign company charge if that company distributed virtually all of its income back to the UK within a specified timeframe.
• the “exempt activities” exemption for non-local holding companies was also repealed, although there is a 24 month transitional period to allow groups to unwind holding structures.  The exemption for local holding companies is to be retained. 

These changes are in section 36 of, and Schedule 16 to, the Finance Act 2009 and are generally a consequence of the first change referred to above. 

Finally, it repealed the old treasury consent rules and notification requirements and replaced them with a new post-transaction reporting regime for transactions undertaken on or after 1 July 2009.  The new rules apply to transactions with a value of £100 million or more, subject to a number of exclusions.  These include exclusions based on the old general treasury consent rules and an exclusion for trading transactions.  A report of the relevant transaction must be made to HM Revenue and Customs within six months of the transaction, with a transitional provision for transactions taking place between 1 July 2009 and 30 September 2009.  The changes were made by section 37 of, and Schedule 17 to, the Finance Act 2009 and in the International Movement of Capital (Required Information) Regulations 2009 (SI 2009/2192).  These changes reduces compliance burdens for significant number of transactions.