Post by Smith on Feb 26, 2009 5:40:13 GMT 4
UK: Taxation of foreign profits and investment funds updates
On December 9 2008, the government released preliminary draft legislation detailing its proposals to overhaul the taxation of foreign profits derived by UK companies. The changes will represent opportunities and material risks for clients. Broadly, the proposals are:
* Dividend taxation: as drafted, all dividends and other company distributions dividends will be within a new charge to tax, subject to certain exemptions which are likely to apply to the majority of UK companies currently receiving UK dividends tax free. This will, however, pose an extra administrative burden as each dividend will need to be checked for compliance with the new rules. This new tax also applies to dividends paid by UK and foreign companies.
* Worldwide debt-cap: UK interest deductions claimed by large groups (as defined) will be capped where the UK has more debt than the external debt of the worldwide group (i.e. the UK part of a group has excessive borrowings). Finance costs will be examined on consolidated accounts prepared in accordance with International Accounting Standards (IAS).
* Controlled foreign companies: consequential technical changes as a result of dividend taxation amendments. More wide reaching reform expected in the future. These changes are the abolition of (a) the Acceptable Distribution Policy exemption and (b) the exemption for holding companies.
* Loan relationships and derivative contracts: these rules will be extended to examine whether the loan relationship has an unallowable purpose and whether the arrangements taken as a whole are tainted by tax avoidance motives. The concept of tax avoidance is very widely framed.
* Treasury consents: Treasury consents will be abolished and replaced with quarterly reporting requirements.
Investment funds
On December 16 2008 the government published a number of documents relevant to the investment funds sector. Of very significant interest is the long-awaited draft legislation setting out the new characteristics based definition of an offshore fund, the proposals for which were first brought to our attention in October 2007 following on from the changes made to the definition by the Finance Act 2007. The key point to note is that the proposed new definition and abolition of the seven year material interest test is likely to bring significantly more offshore funds within the scope of the rules. The government seems intent on bringing in the proposed changes in the Finance Bill 2009 to take effect from October 1 2009. However, until the provisions are finalised and further detailed guidance issued, there will be a prolonged period of uncertainty for investors and funds alike.
In addition to the draft legislation for a new definition of an offshore fund, the government's Further Steps paper also includes a further set of draft regulations for consultation. The latest regulations provide detail with regard to the proposed new regime to report income of offshore funds, rather than to distribute it. These changes are also due to come into force on October 1 2009.
Further to the announcement in this year's pre-budget report, the government has also published a consultation paper setting out proposals for legislative change to give increased certainty as to whether transactions carried out by Authorised Investment Funds are trading or investment.
Following on from the consultation papers published on July 28 2008 containing proposals designed to enhance the competitiveness of the UK asset management industry, also published on December 16 was a "Next Steps" paper regarding the proposed changes to the investment trust companies tax regime to enable them to invest in bonds tax efficiently by 'streaming' their income from interest bearing assets.
In addition, a "Summary of Responses" to the proposed "Tax Elected Fund Regime" for UK authorised investment funds has been published. This proposal would give a direct tax exemption for Authorised Investment Funds, ie, UK tax resident authorised unit trusts and open-ended investment companies. The intended effect of the proposed direct tax exemption would be to move the point of taxation from the Authorised Investment Fund to the investor, so that an investor in a tax elected fund would be taxed as if they owned the underlying assets directly.
Bradley Philips (bradley.philips@herbertsmith.com)
Janette Sawden (janette.sawden@herbertsmith.com)
& Meg Francis (meg.francis@herbertsmith.com)
London
On December 9 2008, the government released preliminary draft legislation detailing its proposals to overhaul the taxation of foreign profits derived by UK companies. The changes will represent opportunities and material risks for clients. Broadly, the proposals are:
* Dividend taxation: as drafted, all dividends and other company distributions dividends will be within a new charge to tax, subject to certain exemptions which are likely to apply to the majority of UK companies currently receiving UK dividends tax free. This will, however, pose an extra administrative burden as each dividend will need to be checked for compliance with the new rules. This new tax also applies to dividends paid by UK and foreign companies.
* Worldwide debt-cap: UK interest deductions claimed by large groups (as defined) will be capped where the UK has more debt than the external debt of the worldwide group (i.e. the UK part of a group has excessive borrowings). Finance costs will be examined on consolidated accounts prepared in accordance with International Accounting Standards (IAS).
* Controlled foreign companies: consequential technical changes as a result of dividend taxation amendments. More wide reaching reform expected in the future. These changes are the abolition of (a) the Acceptable Distribution Policy exemption and (b) the exemption for holding companies.
* Loan relationships and derivative contracts: these rules will be extended to examine whether the loan relationship has an unallowable purpose and whether the arrangements taken as a whole are tainted by tax avoidance motives. The concept of tax avoidance is very widely framed.
* Treasury consents: Treasury consents will be abolished and replaced with quarterly reporting requirements.
Investment funds
On December 16 2008 the government published a number of documents relevant to the investment funds sector. Of very significant interest is the long-awaited draft legislation setting out the new characteristics based definition of an offshore fund, the proposals for which were first brought to our attention in October 2007 following on from the changes made to the definition by the Finance Act 2007. The key point to note is that the proposed new definition and abolition of the seven year material interest test is likely to bring significantly more offshore funds within the scope of the rules. The government seems intent on bringing in the proposed changes in the Finance Bill 2009 to take effect from October 1 2009. However, until the provisions are finalised and further detailed guidance issued, there will be a prolonged period of uncertainty for investors and funds alike.
In addition to the draft legislation for a new definition of an offshore fund, the government's Further Steps paper also includes a further set of draft regulations for consultation. The latest regulations provide detail with regard to the proposed new regime to report income of offshore funds, rather than to distribute it. These changes are also due to come into force on October 1 2009.
Further to the announcement in this year's pre-budget report, the government has also published a consultation paper setting out proposals for legislative change to give increased certainty as to whether transactions carried out by Authorised Investment Funds are trading or investment.
Following on from the consultation papers published on July 28 2008 containing proposals designed to enhance the competitiveness of the UK asset management industry, also published on December 16 was a "Next Steps" paper regarding the proposed changes to the investment trust companies tax regime to enable them to invest in bonds tax efficiently by 'streaming' their income from interest bearing assets.
In addition, a "Summary of Responses" to the proposed "Tax Elected Fund Regime" for UK authorised investment funds has been published. This proposal would give a direct tax exemption for Authorised Investment Funds, ie, UK tax resident authorised unit trusts and open-ended investment companies. The intended effect of the proposed direct tax exemption would be to move the point of taxation from the Authorised Investment Fund to the investor, so that an investor in a tax elected fund would be taxed as if they owned the underlying assets directly.
Bradley Philips (bradley.philips@herbertsmith.com)
Janette Sawden (janette.sawden@herbertsmith.com)
& Meg Francis (meg.francis@herbertsmith.com)
London