Introduction Details of the Schedule Part 2 – Amendment of Exempt Activities Exemption
18.Part 2 of the Schedule provides for the amendment of the special rules for holding companies in the exempt activities exemption. They remove the rules providing exemption for ‘superior holding companies’ and ‘non-local holding companies’. The exemption will thereafter only relate to the third category, local holding companies.
19.Paragraph 10 amends Part 2 of Schedule 25 to ICTA containing the exempt activities exemption and repeals those elements of it relating to holding companies other than local holding companies. It also removes references to ‘superior holding companies’ from the legislation and repeals the related definition at paragraph 12A.
20.Paragraph 11 makes consequential changes to the relevant Finance Acts.
21.Paragraph 12 states that the changes in Part 2 have effect for the accounting period of a CFC beginning on or after the commencement date. For ‘qualifying holding companies’ the commencement date is 1 July 2011; for all other companies the commencement date is 1 July 2009.
22.Paragraph 13 defines a ‘qualifying holding company’ as a CFC that was an ‘exempt holding company’ for the duration of the last accounting period to end before 1 July 2009 but specifically excluding an accounting period created by Part 2 of this Schedule.
23.An ‘exempt holding company’ is a company which throughout a particular accounting period was engaged in exempt activities under the special rules applying to non-local and superior holding companies.
24.The distinction between qualifying and non-qualifying holding companies is fundamental to the operation of the Schedule. It underlies the mechanism by which transitional relief is provided elsewhere in the Schedule.
25.Paragraph 14 contains rules that apply where a CFC has an accounting period that straddles 1 July 2009. In such circumstances the straddling period shall be treated as split into two deemed accounting periods to facilitate the repeal of the superior and non–local holding company rules.
26.The first deemed period will begin on the first day of the straddling period and end on 30 June 2009; the second will begin on 1 July 2009 and end on the last day of the straddling period. The CFC’s gross income, chargeable profits and creditable tax should be apportioned between the two periods on a time basis according to their respective lengths.
27.Paragraph 15 contains similar rules which apply to a qualifying holding company which has an accounting period which straddles 1 July 2011.
28.The straddling accounting period is again to be treated as split into two deemed accounting periods. The first will begin on the first day of the straddling period and end on 30 June 2011; the second will begin on 1 July 2011 and end on the last day of the straddling period. The CFC’s gross income, chargeable profits and creditable tax should be apportioned between the two periods on a time basis according to their respective length.
29.The rules in paragraphs 14 and 15 are required to ensure that profits accruing in periods straddling 1 July 2009 and 1 July 2011 are treated appropriately. For CFCs which are not qualifying holding companies 1 July 2009 marks the point from which only the local holding company exemption will be available.
30.For a qualifying holding company 1 July 2009 marks the beginning of a two year transitional period in which the superior and non-local holding company rules will continue to be available subject to the provisions of paragraph 17. The transitional period defers the commencement date for qualifying holding companies until 1 July 2011 after which only the local holding company exemption will be available.
31.Paragraph 16 contains the definition of ‘relevant accounting period’, a term employed in paragraph 17. A relevant accounting period is one that falls within the two year transitional period established for qualifying holding companies by the deferred commencement date.
32.Paragraph 17 contains the special rules that apply to a qualifying holding company in the transitional period. They set out that in relation to a relevant accounting period of a qualifying holding company, paragraphs 6(4) and (4A) of Schedule 25 have effect subject to certain specified conditions. These mean that transitional relief is not automatically available to qualifying holding companies where levels of non-qualifying gross income exceed historic flows.
33.Sub-paragraph (2) sets out these criteria. They say that the non-local and superior holding company rules in paragraphs 6(4) or (4A) of Schedule 25 will only apply if the conditions set out in those paragraphs are satisfied, and additional criteria, referred to as conditions A and B, are also met.
34.Sub-paragraph (3) sets out condition A which is that at all ‘material times’ the group of companies of which the CFC was a member must have had the same ultimate parent.
35.Sub-paragraph (4) defines ‘material times’ as at the beginning of 9 December 2008 and all times during the accounting period in question.
36.Sub-paragraph (5) defines Condition B, which is satisfied where the amount X does not exceed amount Y.
37.Sub-paragraph (6) identifies amount X as the amount of the CFC’s gross income in the accounting period that is ‘non-qualifying gross income’, defined in Sub-paragraph (9) as gross income which does not help a CFC satisfy the existing non-local and superior holding company rules.
38.This definition builds on the existing statutory term ‘gross income’, used in Schedule 25, which broadly speaking refers to the full amount of any income to which a CFC is entitled during an accounting period before any expenses are deducted.
39.Exemption is available under the existing holding company rules where at least 90 per cent of a holding company’s gross income during the accounting period comes from companies that it controls and which, if not themselves holding companies, are engaged in exempt activities. There are detailed rules setting out what income can qualify as part of the 90 per cent for each of the different types of holding company.
40.Sub-paragraph (7) establishes that amount Y is the highest amount of non-qualifying gross income arising in an earlier reference period or periods. Sub-paragraph (9) specifies that a reference period is an accounting period of the CFC that is any one of its last three accounting periods ending before 9 December 2008, and an accounting period in relation to which the CFC was an exempt holding company. However where there is no reference period the Schedule specifies a default reference period of 12 months ending on 9 December 2008.
41.Sub-paragraph 8 provides for a time apportionment where amounts X and Y arise in periods of differing length to ensure that the comparison between the two amounts is consistent.
42.The effect of paragraph 17 is to limit the amount of non-qualifying gross income in the transitional periods to the highest amount arising in any of up to three earlier reference periods. As is made clear in paragraph 17(2)(a) the existing gross income test must be satisfied so at least 90 per cent of the CFC’s gross income must be qualifying income. However, notwithstanding this, if the amount of non–qualifying gross income in the relevant period exceeds the level set by amount Y then the CFC will fail to qualify for exemption.
43.Paragraph 18 defines ‘ultimate corporate parent’ and ‘group’ for the purposes of paragraph 17(3).
44.Paragraph 19 contains an anti-avoidance rule. It applies where a company alters its accounting date so that a particular period that otherwise would have fallen into an accounting period ending on or after 9 December 2008 instead falls into an accounting period ending before that date.
45.Paragraph 20 states that ‘accounting period’, ‘chargeable profits’, ‘control’, ‘controlled foreign company’, ‘creditable tax’ and ‘gross income’ take the meaning given to them for the purposes of the CFC rules.