LAM12100 - International and cross border: Controlled Foreign Companies (CFC): overview TIOPA10/S371BG-BH

SI2012/3044: The Insurance Companies and CFCs (Avoidance of Double Charge) Regulations 2012

Insurance companies writing long-term business are subject to the normal CFC provisions in TIOPA10/PART9A with specific provisions for companies writing BLAGAB in TIOPA10/S371BH supplemented by the regulations in SI2012/3044. These regulations aim to ensure the practical application of the CFC rules to BLAGAB avoiding unnecessary complexity and minimising the likelihood of a double charge to tax.

The basic CFC rules in the legislation are explained in the International Manual INTM190000. This section aims to summarise the main considerations for life companies and explain the provisions in the regulations which are not specifically covered in the International manual.

Life insurers non-BLAGAB business will not be subject to a CFC charge on investments in shares on the basis that for non-BLAGAB (and BLAGAB trade profit computations) increases in value and dividends received will all be included in the computation of trading profit TIOPA10/371BG.

However, there may be a CFC charge, for example on LTBFC, on a life insurer under the more general provisions and in particular TIOPA10/PART9A/CH6. This is explained further in the International Manual (INTM207000).

The particular issue for life companies writing BLAGAB arises because life insurers will often have significant holdings in offshore investment vehicles which will bring them within the relevant interest rules in TIOPA10/PART9A/CH15 (INTM227200). The life company may, for example, have been the primary initial investor in an in-house investment fund set up by its associated investment management company. The fund would then subsequently be marketed to external investors. In addition, life companies will often hold many hundreds of offshore fund investments which themselves may have complex substructures. Property holdings are often in this category with non-UK properties held in individual overseas entities within an overall structure. The compliance burden of reviewing all of these individually for CFC purposes would be disproportionate to the tax risk.

In most cases, the return is held for the policyholder and the I-E regime already ensures appropriate taxation in the UK. The CFC regime aims to tax profits accruing to shareholders and therefore adjustments have been made to take this into account and ease the compliance burden.

The CFC legislation and regulations cover explicitly the following situations for insurance companies subject to tax on the I-E basis:

  1. Offshore funds: Exclusion from the CFC charge for appropriate I-E investments which would otherwise trigger a CFC charge – TIOPA10/S371BH and SI2012/3044/Regulation 5 (LAM12110)
  2. Definition of control: modification for certain offshore fund holdings to align it with accounting standards – SI2012/3044/Regulation 3 (LAM12120)
  3. Equity funds: An exclusion for certain offshore funds mainly holding equities – SI2012/3044/Regulation 4 (LAM12130)
  4. Double charge: modification to TCGA92/S212 chargeable gains computation to adjust the market value to take account of any amounts already taxed under the CFC charging provisions SI2012/3044/Regulations 2 and 6 (LAM12140)

Items 2 and 3 are simplification measures, recognising the scale and complexity of investment vehicles held by life companies and the extent of compliance costs from a strict application of the rules. In practice, items 1- 3 mean that most life company investments will not be subject to a CFC charge. However, where those circumstances do arise, item 4 provides relief from a double charge to tax.

Holdings in bonds or bond funds are generally treated as loan relationships and subject to tax on income and increases in value both in BLAGAB and non-BLAGAB calculations. Accordingly they would not be within the scope of the CFC charge: TIOPA10/S371BG (7) and INTM194750.

There are also CFC provisions relating to fund managers that may be relevant to investment management operations within life insurance group. These are explained in the INTM194650.