UK CFCs - Low Profit Margin Exemption?

[-Joe-]

Just wondering, I'm struggling to find any material on this that isn't just parroting what HMRC says, and HMRC have done the total opposite of what they often do, and have written almost nothing on it. So can UKBF help? I'm just trying to clarify any potential things that wouldn't be covered under this.

For example, say I run a company selling widgets, I make a 5% margin on these widgets, and the company and I do nothing but sell widgets. High volume, low margin.

Surely I must be misunderstanding something, but wouldn't this mean the company could then totally exempt itself from UK tax by incorporating outside the UK, but still controlling from the UK? HMRC seems to cite back office processing kind of jobs, i.e. outsourcing to India etc, but I'm confused as to whether this applies to businesses where the entire model is low margin?

Joe

 

[-Joe-]

(sorry, can't edit anymore)

Quote of the law on it, can't see any problems, but I must be wrong??

http://www.hmrc.gov.uk/drafts/chapter-13-update.pdf HMRC's short pdf on it.

371MBThe basic rule

(1)The low profit margin exemption applies for a CFC’s accounting period if the CFC’s accounting profits for the period are no more than 10% of the CFC’s relevant operating expenditure.

(2)In this section references to the CFC’s accounting profits are to those profits as determined before any deduction for interest.

(3)The CFC’s “relevant operating expenditure” is its operating expenditure brought into account in determining its accounting profits for the accounting period, excluding—

(a)the cost of goods purchased by the CFC, other than goods used by the CFC in the territory in which it is resident for the accounting period, and

(b)any expenditure which gives rise, directly or indirectly, to income of a person related to the CFC.
371MCAnti-avoidance

The low profit margin exemption does not apply for a CFC’s accounting period (“the relevant accounting period”) if—

(a)an arrangement is entered into at any time,

(b)in consequence of the arrangement, the low profit margin exemption would (apart from this section) apply for the relevant accounting period, and

(c)the main purpose, or one of the main purposes, of the arrangement is to secure that the low profit margin exemption applies—

(i)for the relevant accounting period, or

(ii)for that period and one or more other accounting periods of the CFC.

 

[-Joe-]

I'm gonna give this a bump.

Someone must know?

 

[teddys]

Dear Sir,

What exactly is your query? Are you querying if controlled foreign companies (CFC) rules will apply to you? It shouldn't, but to take this thread to its logical conclusion please let us know what you do in the UK and overseas, and how much you do??

 

[-Joe-]

Dear Sir,

What exactly is your query? Are you querying if controlled foreign companies (CFC) rules will apply to you? It shouldn't, but to take this thread to its logical conclusion please let us know what you do in the UK and overseas, and how much you do??

I'm querying whether someone who makes a margin of less than 10%,with a mix of global/UK/EU income, could form a business outside of the UK in say Gibraltar, make it owned by a UK holding company, and exercise management and control from the UK without being liable for UK tax, except for any money repatriated via the UK holding company?

 

[teddys]

So you will have a subsidiary of the UK company in a low tax jurisdiction. What is the expected profit of the subsidiary in a tax year??

 

[-Joe-]

So you will have a subsidiary of the UK company in a low tax jurisdiction. What is the expected profit of the subsidiary in a tax year??

Yeah, and high 6 figures, low 7 figures.

 

[teddys]

Can I take high 6 figures to mean roughly £1 million in profit? Since yours is a company making low margins of say 10% your subsi turnover works out to £10 million. May I ask what is the nature of the business?

 

[-Joe-]

Can I take high 6 figures to mean roughly £1 million in profit? Since yours is a company making low margins of say 10% your subsi turnover works out to £10 million. May I ask what is the nature of the business?

It's selling a low margin, high demand product - for obvious reasons, I'd prefer not to post too much more about it than that - if you tell me where your line of thinking is, I can tell you whether it would apply or not. And yes, turnover + profit figures are roughly correct.

 

[teddys]

CFC rules were originally made to prevent large multinationals from artificially diverting UK profits by creating subsidiaries in low tax jurisdictions. These rules were radically overhauled effective 01 Jan 2013. The amended rules provide a list of exemptions such as:

- the tax exemption
- excluded territories exemption
- low profits exemption
- low profit margin exemption

If none of these exemptions apply the CFC profits will need to pass through various 'gateways' before a CFC charge could apply. In short, the likelihood of a CFC charge applying to small and, to some extent, to medium sized businesses is very slim.

Indeed if you wish to open a subsi of a UK company in a low tax jurisdiction what you should be more concerned about is that the dividends received by the UK company will be taxed in the UK if ' a non-discrimination' clause' is non-existent in the tax treaty between the UK and the subsi country.

 

[-Joe-]

CFC rules were originally made to prevent large multinationals from artificially diverting UK profits by creating subsidiaries in low tax jurisdictions. These rules were radically overhauled effective 01 Jan 2013. The amended rules provide a list of exemptions such as:

- the tax exemption
- excluded territories exemption
- low profits exemption
- low profit margin exemption

If none of these exemptions apply the CFC profits will need to pass through various 'gateways' before a CFC charge could apply. In short, the likelihood of a CFC charge applying to small and, to some extent, to medium sized businesses is very slim.

Indeed if you wish to open a subsi of a UK company in a low tax jurisdiction what you should be more concerned about is that the dividends received by the UK company will be taxed in the UK if ' a non-discrimination' clause' is non-existent in the tax treaty between the UK and the subsi country.

Excellent to hear! Thanks very much. Dividends should be minimal, I don't need a lot to live on, so tax shouldn't be too much of a problem there. Would a business falling under the low profit margin exemption be allowed to do all 3 levels of management inside the UK, providing there are worldwide sales and a valid non-tax motive for being in Gibraltar?

 

[teddys]

If the CFC is exempt under low profit margin exemption then end of the story- no CFC charge. Motive test no more relevant. As with every piece and part of tax legislation an anti-avoidance rule is added to the low profit margin exemption rule too - basically the whole exercise shouldn't be an arrangement with tax avoidance in mind.