The tax treatment of dividends from controlled companies (CC) and the proposed new rules for taxing the profits of such companies are interdependent.
Exemption provides a simpler tax treatment of foreign dividends, but also provides opportunities for artificial profit diversion. The new CC rules and limited, targeted interest changes are intended to prevent this abuse.
For participation holdings (defined as shareholdings of 10% or more), the discussion paper proposes that dividends received by large and medium business from the profits of foreign companies would be exempt from tax in those cases where the new CC rules apply to those foreign companies.
Small businesses do not face the same issues in relation to the existing credit system and generally do not have foreign shareholders. In addition, the Government does not believe it is appropriate to require them to operate the proposed controlled companies rules. The paper therefore proposes a simplified credit regime for small business, with simplified CC rules applying for a minority of small businesses and most small business exempt from the CC rules.
The proposed CC regime will refocus the current controlled foreign companies regime from an entity-based “all-or-nothing” regime to a targeted, income-based regime, which will tax the UK parent on specifically defined mobile income, that is effectively within the control and disposition of the UK parent. For the passive income category of mobile income, the rules will apply whether this income arises in UK or foreign subsidiaries.