New UK Legislation: Controlled Foreign Companies (Reversal of State Aid Recovery) Regulations 2024
Introduction
The UK government has introduced new legislation, the Controlled Foreign Companies (Reversal of State Aid Recovery) Regulations 2024, which reverses the recovery of state aid from certain controlled foreign companies (CFCs).
Background
In 2017, the European Commission (EC) ruled that the UK tax regime for CFCs constituted state aid and ordered the UK to recover the related tax advantages. This ruling affected a number of companies, particularly those with overseas subsidiaries in low-tax jurisdictions.
Reversal of State Aid Recovery
The new Regulations reverse the recovery of state aid for CFCs that meet certain conditions. These conditions include:
- The CFC is a close company (i.e., it is controlled by five or fewer individuals).
- The CFC is resident in a jurisdiction that has a tax rate of less than 60% of the UK corporation tax rate.
- The CFC is not engaged in any significant trading activities.
Conditions for Reversal
To qualify for the reversal of state aid recovery, CFCs must also meet the following conditions:
- The CFC has not been subject to a transfer pricing adjustment by the UK tax authorities.
- The CFC has not claimed any double taxation relief in respect of withholding taxes suffered on dividends received from other CFCs.
- The CFC has not utilized any tax avoidance schemes.
Consequences of Reversal
For eligible CFCs, the reversal of state aid recovery will mean that they will no longer be liable to repay the additional tax that was imposed on them under the previous state aid rules. This will provide significant financial relief to these companies.
Impact on UK Tax Revenue
The reversal of state aid recovery is estimated to reduce the UK’s tax revenue by approximately £200 million per year. However, the government believes that the benefits of the new legislation, such as increased investment and job creation, outweigh the revenue loss.
Conclusion
The Controlled Foreign Companies (Reversal of State Aid Recovery) Regulations 2024 are a significant development for UK companies with overseas subsidiaries. The legislation provides welcome relief from the additional tax burden that was imposed under the previous state aid rules and is expected to have a positive impact on investment and job creation.
The Controlled Foreign Companies (Reversal of State Aid Recovery) Regulations 2024
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