Introduction Details of the Schedule Part 1.Controlled Foreign Companies Chapter 2 – The CFC Charge
12.New section 371BA outlines the basis on which a CFC charge is to be applied to a UK resident company. The CFC charge is imposed in relation to a CFC’s accounting period only if the CFC has chargeable profits for that period and none of the entity level exemptions set out in Chapters 10 to 14 apply for that period.
13.New section 371BA(3) defines a CFC’s chargeable profits for an accounting period as its assumed taxable total profits (see Chapter 19) for that period, determined on the basis that:
	its assumed total profits (see Chapter 19) are limited to those profits that pass through the CFC charge gateway, as explained further in new section 371BB; and
	amounts are to be relieved against those profits (as provided for in step 2 of section 4(2) of the Corporation Tax Act 2010 (CTA 2010)) only so far as is just and reasonable, having regard to the limitation of profits passing through the CFC charge gateway.
14.New section 371BB(1) sets out the steps for determining the extent to which a CFC’s assumed total profits for an accounting period pass through the CFC charge gateway.
15.Step 1 is to determine under Chapter 3 which (if any) of Chapters 4 to 8 apply for that period. If none of those Chapters apply step 2 is not to be taken as none of the assumed total profits pass through the CFC charge gateway.
16.Step 2 is to apply Chapters 4 to 8 so far as required by Step 1 to determine how much (if any) of the CFC’s assumed total profits fall within those chapters for the accounting period and hence pass through the CFC charge gateway.
17.New section 371BB(2) provides that subsection (1) is subject to Chapter 9 (exemptions for profits from qualifying loan relationships) and new section 371JE, which provides for adjustments of profits which would otherwise pass through the gateway where the exempt period exemption in Chapter 10 applies.
18.New section 371BC provides that, where there are profits that pass through the CFC charge gateway, the CFC charge is determined in accordance with a series of steps. These are used to work out whether or not a charge arises and, if it does, which UK resident companies are chargeable. The detailed rules that explain how these steps are to be applied are provided by subsequent chapters of Part 9A.
	Step 1 of new section 371BC(1) is to determine in accordance with Chapter 15 the persons (the relevant persons) who have relevant interests in the CFC at any time during the accounting period.  A CFC charge will arise for an accounting period only where a relevant person meets the UK residence condition set out at new section 371BC(2).  If there are no such persons no further steps are to be taken and no CFC charge arises for the accounting period.
	Step 2 is to determine the CFC’s creditable tax for the accounting period in accordance with Chapter 16.
	Step 3 is to apportion the chargeable profits and creditable tax of a CFC among the relevant persons in accordance with Chapter 17.
	Step 4 limits the CFC charge to chargeable companies, which are companies that hold a specified level of interest in the CFC as determined by new section 371BD. If there are no chargeable companies Step 5 is not to be taken and no CFC charge is to be charged for the accounting period.
	Step 5 charges the CFC charge on each chargeable company.  The charge is a sum equal to the appropriate rate of corporation tax on P% of the CFC’s chargeable profits, less Q% of the CFC’s creditable tax. The appropriate rate, P% and Q% are defined in new section 371BC(3). The charge is calculated as if it were an amount of corporation tax charged on the company for the “relevant corporation tax accounting period” (defined at new section 371BC(3)). This step is subject to the application of new section 371BG (companies holding shares as trading assets etc) and new section 371BH (companies carrying on basic life assurance and general annuity business).
19.New section 371BC(2) sets out the residence condition for step 1, which is met if a company is resident in the UK at a time during the accounting period when it has a relevant interest in the CFC.
20.New section 371BC(3) defines a number of terms for the purposes of taking Step 5 and charging the CFC charge in relation to a chargeable company.
21.New section 371BD(1) in effect provides the definition of a “chargeable company” where a company meets the residence condition (of section 371BC(2)). Such a company is a chargeable company if the percentage of the chargeable profits apportioned to it, together with the percentages of the chargeable profits (if any) apportioned to relevant persons connected or associated with it at any time during the accounting period, are at least 25 per cent of the total chargeable profits of the CFC. So if, following Step 3 of section 371BC(1), two UK resident companies which are members of the same group, respectively have 90 per cent and 10 per cent of the CFC’s chargeable profits apportioned to them, they are both chargeable companies. New section 371BD(1) is subject to the application of new section 371BE (companies which are managers of offshore funds) and new section 371BF (companies which are participants in offshore funds).
22.New section 371BE removes from charge, for the purposes of step 4 of section 371BC(1), companies which are managers of offshore funds and hold a relevant interest in a CFC by virtue of an investment made in order to “seed” a fund. Four conditions must be met. They are set out at new section 371BE(1) as follows:
23.The fund management condition at new section 371BE(3) itself comprises three conditions. At all times during the accounting period during which a company has a relevant interest in the offshore fund;
24.New section 371BF provides circumstances in which companies which are participants in offshore funds will not be chargeable companies. Difficulties can occur in identifying when a UK company with an interest in an offshore fund may fall to be a chargeable company when the relevant interest may be close to the 25 per cent threshold set at section 371BD. This is because the proportionate holding in an offshore fund may fluctuate as by their nature offshore funds acquire and lose investors over time.
25.New section 371BF(1) deems a company not to be a chargeable company for the purposes of Step 4 in section 371BC(1) if:
26.Thus where a CFC is an offshore fund, a company participating in the fund will not be a chargeable company provided that at particular points during the accounting period (see below) it reasonably believes that its interest does not exceed the 25 per cent requirement, and provided that if the 25 per cent requirement is exceeded the cause is not directly attributable to the participant company or any persons connected or associated with it.
27.New subsection (2) defines the “relevant time” at which the participant company must hold the reasonable belief regarding its interest. The relevant time is the beginning of the accounting period, or if the company has no relevant interests in the offshore fund at the beginning of the accounting period, the time when the company first has a relevant interest during the accounting period.
28.New subsection (3) determines that any “subsequent relevant time” for considering the reasonable belief of the participant company is any time during the accounting period at which there is an increase or some other change in the relevant interests of the company to which the section applies.
29.New section 371BG modifies the calculation of the CFC charge for the relevant corporation tax accounting period where the chargeable company has a relevant interest that is a direct or indirect shareholding in a CFC. The section applies if the chargeable company treats any increase in the value of those shares and any distributions received from them as income for the purposes of its charge to corporation tax.
30.New section 371BG(1) provides that new subsection (2) applies to a chargeable company that holds a relevant interest in a CFC if conditions A to C are met at all times during the CFC’s accounting period.
31.New subsections (2) and (3) modify the operation of Step 5 in section 371BC(1). The modification in effect omits as much of the amounts P% and Q% as reflects the relevant interest as described in section 371BG, without affecting any CFC charge that may arise from any other relevant interest.
32.P% and Q% in Step 5 refer respectively to the proportions of the CFC’s chargeable profits and its creditable tax that are taken into account in calculating the chargeable company’s CFC charge.
33.New subsection (4) sets out Condition A which is met if the relevant interest or the part of a relevant interest is held by way of a direct or indirect holding by the chargeable company of shares in the CFC.
34.New subsection (5) sets out Condition B which is met if any increase in the value of the shares mentioned in Condition A is brought into account in determining the income of the chargeable company for corporation tax purposes.
35.New subsection (6) sets out Condition C which is met if any dividend or other distribution received by the chargeable company directly or indirectly from the shares mentioned in Condition A is brought into account in determining its income for corporation tax purposes.
36.New subsections (7) and (8) provide that Conditions B and C are taken to be met if:
37.New subsection (9) provides that section 371BG is subject to new section 371BH (companies carrying on basic life assurance and general annuity business), which has the effect of restoring the CFC charge if certain conditions are met.
38.New section 371BH modifies the application of Step 5 of new section 371BC(1) for companies that carry on basic life assurance and general annuity business (BLAGAB).
39.New section 371BH(1) sets out the conditions to be met if Step 5 at new section 371BC(1) is to be taken in line with new section 371BH(2) and (3). The conditions are:
40.New subsection (2) provides for additional sum to be charged on the chargeable company and step 5 in section 371BC(1) is to be taken on the basis set out in new subsection (3).
41.New subsection (3) in effects limits the additional sum charged in relation to the relevant interest of the chargeable company to the policyholders’ share of the BLAGAB component of the CFC’s apportioned profit (see subsection (11) below), which is charged at an ”appropriate rate”.
42.The appropriate rate is determined by reference to section 102 of the Finance Act 2012 (FA 2012), or an average rate where there is more than one such rate over the relevant corporation tax period. The CFC’s creditable tax to be apportioned to the chargeable company is calculated by reference to the proportion that the policyholders’ share of the BLAGAB component of the apportioned profit is of the whole of the apportioned profit.
43.New subsection (4) defines Condition D which is met if the relevant interest or the part of a relevant interest is held by way of a direct or indirect holding by the chargeable company of shares in the CFC.
44.New subsections (5) and (6) define Condition E which is met if no part of any increase in the value of the shares mentioned in Condition D is brought into account at step 1 in section 73 of FA 2012 in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period.
45.New subsections (7) and (8) define Condition F which is met if no part of any dividend or other distribution received by the chargeable company directly or indirectly from the shares mentioned in Condition D is brought into account at step 1 in section 73 of FA 2012 in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period.
46.New subsection (9) defines condition G which is met if any part of the shares mentioned in Condition D is held for the purposes of the chargeable company’s long term business.
47.New subsection (10) defines ‘the apportioned profit’ as the part of P% that is attributable to the relevant interest or the part of a relevant interest mentioned in Condition D (CC’s relevant interest).
48.New subsection (11) sets out the steps required to determine the “BLAGAB component” of the apportioned profit:
	first assume that the apportioned profit was income paid to CC at the end of the CFC’s accounting period that is brought into account for the purpose of computing its life insurance profits;
	on the basis of that assumption, determine how much of the apportioned profit would be referable to CC’s BLAGAB business. That amount is the ‘BLAGAB component’ of the apportioned profit.
49.New subsection (12) explains that the “policyholders’ share” of the BLAGAB component is equal to the policyholders’ share of the I-E profit for the relevant corporation tax accounting period as determined by Chapter 5 of Part 2 of FA 2012.