UK Government publishes proposals on Controlled Foreign Companies.

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The Government has published proposals for reforming the UK’s Controlled Foreign Company (CFC) rules, as part of its ambition to create the most competitive tax system in the G20.

This marks the next step towards introducing a modernised CFC regime in 2012 that better reflects the way that businesses operate in a globalised economy, and include the Government’s Budget 2011 commitment to introduce a partial exemption for finance companies that will normally result in a 5.75% tax charge on those overseas profits by 2014.

These proposals are designed to strike the right balance between improving the competitiveness of the UK corporate tax system and protecting the UK tax base against avoidance by:

• targeting and imposing a CFC charge on artificially diverted UK profits, so that UK activity and profits are fairly taxed;

• exempting foreign profits where there is no artificial diversion of UK profits; and

• not taxing profits arising from genuine economic activities undertaken offshore.

David Gauke, Exchequer Secretary to the Treasury, said:

“The Government is clear that a key factor in achieving a sustainable recovery must be private sector growth. Multinational business plays an important role in this, but as the market-place has become increasingly globalised, the UK has lost tax competitiveness. These changes to the CFC regime, alongside our substantial programme of corporate tax reforms, will help us to rectify this and ensure that the corporate tax regime is once again an asset for the UK. Our proposals follow discussions with businesses and tax professionals and we welcome further input from them and other interested parties in response to the consultation.”

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