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EXPLANATORY NOTE CLAUSE 96 AND SCHEDULE 27: GROUP RELIEF FOR NON-RESIDENT COMPANIES ETC SUMMARY
1. Clause 96 and Schedule 27 modernise the group relief rules to allow groups and consortia to be established through companies resident anywhere in the world. Group relief will also be extended to UK branches of non-resident companies, and the rules for overseas branches of UK companies will be brought into line. The changes take effect from 1 April 2000. 2. The changes will give multinational groups of companies greater flexibility in structuring their commercial activities in the UK. Similar changes are being made in clause 101 and Schedule 29 to the chargeable gains rules for groups of companies. ________________
DETAILS OF THE CLAUSE
3. Clause 96 introduces Schedule 27, which provides for the principal changes to group relief. Part I of the Schedule contains the substantive provisions and Part II deals with consequential amendments.
_______________ DETAILS OF THE SCHEDULE Part I 4. Paragraph 1 amends the conditions for claiming and surrendering group relief in section 402 of the Taxes Act 1988, by inserting new subsections (3A) and (3B). Its effect, in combination with the change in paragraph 2 below, is to allow UK branches (including agencies) of non-resident companies to claim and surrender relief. 5. Paragraph 2 amends section 413(5), so that references to ‘company’ for group relief purposes are no longer restricted to UK resident companies but extend to any body corporate, and shares held in non-resident companies are no longer disregarded in establishing group and consortium membership. It also provides new definitions of ‘company’ and ‘non-resident company’. 6. Its effect is to allow groups and consortia to be established through a company resident anywhere in the world. 7. Paragraph 3 amends the definition of the qualifying conditions for group relief in section 403A(10), to reflect the extension of group relief to UK branches of non-resident companies. 8. Paragraph 4 inserts new sections 403D and 403E dealing with the application of the group relief rules to branches. 9. New section 403D sets out how the group relief rules apply to a UK branch of a non-resident company. 10. New section 403D(1) restricts the amount available for surrender as group relief by a UK branch to losses or other amounts which fulfil the following conditions:
11. New section 403D(2) excludes from the ‘total profits’ of non-resident companies amounts outside the charge to UK corporation tax and amounts relating to activities which are exempt by virtue of any double taxation arrangements. 12. Its effect is to set the limits for claims to group relief by a non-resident company. 13. New section 403D(3) defines the term ‘non-UK profits’. They are amounts:
14. ‘Non-UK profits’ also includes any amounts taken into account in computing the above amounts. 15. New section 403D(5) provides that amounts are not to be treated as relievable against foreign tax merely because they are brought into account for the purpose of being excluded for foreign tax purposes. The effect is that amounts are not treated as relievable against non-UK profits where the overseas regime exempts them from tax altogether. 16. New section 403D(6) directs that, where relievability under foreign law depends on relievability in the UK, that part of the foreign law should be disregarded in applying the rules in this section. 17. The effect is that the loss is treated as relievable in the foreign territory in preference to the UK, so that it will be relieved in the territory of residence. 18. New section 403D(7) defines what is meant by activities which are exempt from corporation tax by virtue of double taxation arrangements, and new section 403D(8) defines what is meant by double taxation arrangements. 20. New section 403D(9) defines what is meant by ‘foreign tax’. It is tax which is charged in a foreign jurisdiction and corresponds to either UK income tax or UK corporation tax and includes local taxes. 21. New section 403D(10) directs that, in determining whether activities are exempt from corporation tax by virtue of any double taxation arrangements, requirements to claim the exemption should be disregarded. 22. New section 403E contains rules which broadly align the rules for the surrender of losses attributable to overseas branches of UK companies with the rules applying to UK branches of non-resident companies in new section 403D. 23. New section 403E(1), together with new section 403E(2), restricts the amounts available for surrender by a UK resident company where
24. New section 403E(3) excludes losses attributable to life assurance business from the effects of the new section 403E. 25. New section 403E(4) defines what is meant by a loss or other amount which is attributable to an overseas branch. It is the amount which would be available for surrender by the company if that amount were computed only by reference to the overseas branch, applying the same rules which apply to the computation of a loss of UK branch of a non-resident company. For these purposes a UK branch of a non-resident company is defined by new section 403E(5). 26. New section 403E(6) defines an overseas branch of a UK company for the purposes of this section. 27. New section 403E(7) imports the definitions of ‘non-UK profits’ and ‘foreign tax’ used in the new section 403D. 28. New section 403E(8) provides that, where relievability under foreign law depends on relievability in the UK, it is treated as relievable only if the company resident in the UK is also treated as resident in the relevant foreign territory. 29. The effect is that, except in the case of dual residence, priority is given in this section to allowing surrender of the branch loss in the UK, so that the territory of residence has primary responsibility for relieving the loss. 30. Paragraph 5 provides for amendments to the group relief anti-avoidance provisions in Schedule 18 of the Taxes Act 1988. The amendments are required by the extension of the definition of group and consortium membership and the provisions for UK branches of non-resident companies to claim and surrender group relief. 31. Sub-paragraphs (2) and (3) make changes which are required in order to apply the provisions of Schedule 18 satisfactorily to non-resident companies. 32. The main change is the insertion of a new paragraph 5F in Schedule 18, which sets out how the provisions of that Schedule are to apply where group relief is claimed or surrendered by a UK branch of a non-resident company. 33. New paragraph 5F applies for the purposes of determining whether a non-resident company claiming or surrendering group relief is a 75% or 90% subsidiary of another company, and for determining a member’s share in a consortium where the claimant or surrendering company is a non-resident consortium company, in the following circumstances:
34. Its effect is that, where the percentage of profits or assets to which an equity holder is entitled would be less if any distribution of profit or assets were confined to those referable to the non-resident company’s UK trade, then the lesser percentage should be used for the purposes of Schedule 18. 35. Paragraph 6 applies the provisions of Part I of the Schedule to accounting periods ending on or after 1 April 2000 but is subject to more detailed rules, including rules for accounting periods straddling 1 April. 36. Sub-paragraph (1) provides that Part I of the Schedule has no effect for determining whether the qualifying conditions for group relief in section 403A(9) are met before 1 April 2000. 37. The effect is that the extended definition of group and consortium membership and the extension of group relief to UK branches of non-resident companies apply only after 1 April 2000 and parts of accounting periods falling before that date are excluded. 38. Sub-paragraph (2) provides that section 403E (surrender of losses attributable to overseas branches of UK resident companies) has no effect in relation to surrenders for accounting periods ending before 1 April 2000 and provides for an apportionment where an accounting period straddles that date. 39. Sub-paragraph (3) provides that the amendments to Schedule 18 of the Taxes Act in paragraph 5 have effect where Schedule 18 is applied for any purpose in relation to a time on or after 1 April 2000. Part II 40. Paragraphs 7 and 8 amend the rules applying to companies carrying on life assurance business. These companies are excluded from the rules in section 403E because in most cases it would be impossible to determine what is the loss of a particular overseas branch. As a substitute for the rules in section 403E, section 434A has been amended to reverse the order of priority as between a Case I loss for the trade as a whole and a Case VI loss on its overseas life assurance business ("OLAB"). Any Case I loss on the whole business is reduced by the amount of any OLAB Case VI loss. 41. This means that the existing rule in section 434A(b), under which a Case VI OLAB loss is reduced by the amount of any Case I loss, is no longer necessary. It is therefore removed, along with references to it in section 76. 42. Paragraph 9 amends the definition of ‘consortium’ in section 502(3)(c) of the Taxes Act 1988, for the purposes of the ring-fence corporation tax liability of companies carrying on petroleum extraction activities. It ensures that the definition for these purposes remains as it was before the changes to group relief. 43. Paragraph 10 amends the rules for computing the chargeable profits of controlled foreign companies in Schedule 24 of the Taxes Act 1988, to adjust for amounts surrendered by non-resident companies. 44. Paragraph 11 amends the rules in section 102 of the Finance Act 1989 which permit the surrender of tax refunds between companies within the same group. It ensures that the definition of ‘group’ for these purposes remains as it was before the changes to group relief. 45. Paragraph 12 amends the requirements for the contents of a group relief claim in paragraph 68 of Schedule 18 to the Finance Act 1998. It requires that a claim must identify any non-resident claimant or surrendering companies and any non-resident companies through which common group or consortium membership is established. 46. Paragraph 13 sets out the commencement provisions for the consequential amendments in Part II. Paragraphs 7, 8, 10 and 12 apply for accounting periods ending on or after 1 April 2000. Paragraphs 9 and 11 apply where necessary for interpreting the terms ‘consortium’ and ‘group’ respectively in the provisions covered by those paragraphs, following the change in the definitions of those terms for group relief purposes. _______________ BACKGROUND Group relief 47. Group relief allows a company to claim the benefit of trading losses and certain other reliefs of another company if both companies are members of the same group. Its objective is to make the tax treatment of a group carrying on a variety of activities through different companies closer to what it would have been if those activities had been carried on by a single company. A group exists, broadly, where one company owns 75 per cent of the other, or a third company owns 75 per cent of both of them. 48. There is anti-avoidance legislation to prevent the percentages being manipulated in order to create artificial group and consortium relationships (section 413(7) and Schedule 18 of the Taxes Act). Consortium claims to group relief 49. Group relief is extended to consortia. A consortium exists where companies (the consortium members) each own at least 5 per cent, and together own at least 75 per cent, of the share capital of
Branches
50. UK branches of non-resident companies are subject to UK corporation tax on their trading profits. At present their trading losses can be set off only against other profits of the branch or carried forward against future trading profits of the branch. 51. UK-resident companies are subject to corporation tax on their world-wide profits, including any profits made by their overseas branches (though overseas tax paid by the branch can be set against the company’s corporation tax liability). Where an overseas branch makes a loss, that loss will be reflected in the results of the company as a whole. And to the extent that a branch loss forms part of an overall loss made by the company, it may be surrendered as group relief under the current rules. The new rules in section 403E restrict the surrender of losses which are attributable to an overseas branch where they are relievable in the overseas country against non-UK profits. But otherwise the position remains unchanged. ICI v Colmer 52. Following the decision of the European Court of Justice in the case of ICI v Colmer, group relief is available where the existence of a group or consortium is established through companies resident in the European Union or the European Economic Area. The changes introduced in this clause and the associated Schedule go much further, by completely removing any restriction on the residence of companies through which a group or consortium is established and allowing group relief claims and surrenders by UK branches of non-resident companies. EXAMPLES Group example
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In this example the two UK subsidiaries will now be members of the same group, whatever the country of residence of the parent. The two UK subsidiaries will therefore be able to claim and surrender group relief between each other. In addition, if the non-UK resident parent trades in the UK through a branch or agency, the branch will be able to claim group relief from the UK-resident subsidiaries. It will also be able to surrender losses and other amounts to the UK-resident subsidiaries providing those amounts are not relievable against non-UK profits in the overseas country. Consortium example
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In this example the three companies will form a consortium, whatever the country of residence of the non-UK resident member. The UK-resident member of the consortium and the UK-resident trading company will be able to claim and surrender group relief between each other.
In addition, if the non-UK resident consortium member trades in the UK through a branch or agency, the branch will be able to claim group relief from the UK-resident trading subsidiary. It will also be able to surrender losses and other amounts to the UK-resident trading subsidiary providing those amounts are not relievable against non-UK profits in the overseas country.
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