Taxation of foreign profits – draft legislation released

HM Revenue & Customs (HMRC) issued draft legislation of the foreign profits proposals on 9 December 2008. The drafts cover large parts of the legislative changes to be included in Finance Bill 2009, with some of it still in a fairly early stage of development. HMRC invites comments on the draft legislation by 3 March 2009.

The main points from the draft legislation include:

• The dividend exemption appears to be wide ranging, but UK-UK dividends prima facie are taxable and assessing whether or not they fall within the exemption could significantly increase a group's compliance burden;
• The interest capping provisions appear to be extremely complex and potentially difficult to operate in practice;
• A new provision to run alongside the interest restrictions on loans for unallowable purposes is to be enacted and existing loan relationships should be reviewed;
• The controlled foreign company (CFC) holding company exemption is to be repealed in its entirety but has a 24 month transitional period; and
• There will be a 'transitional' period for acceptable distribution policies (ADPs) paid in respect of profits earned before the commencement date.

Actions to consider
The proposals raise significant issues and opportunities which need to be considered now as they may require transactions to be implemented before the commencement date. Groups need to consider the full impact of these changes, potential solutions and opportunities and an appropriate course of action.

HMRC has invited comments on the draft legislation by 3 March 2009. This provides an opportunity for companies to contribute further to the discussion process and consider points on which further lobbying may be appropriate.

A more detailed overview of the draft legislation is available on PwCPlus.

In a webcast on 16 February, tax partner Peter Maybrey and colleagues analysed the draft legislation in the light of recent HM Treasury / HMRC open days, and considered what companies should be doing now. Watch the webcast on PwCPlus.

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PricewaterhouseCoopers international structuring tax specialists can help with any queries relating to how your business might be affected by changes to the rules for the taxation of foreign profits.