In June the Government published proposals for completing its reform of the UK's Controlled Foreign Company (CFC) rules. CFC legislation allows HMRC to treat certain profits arising outside the UK (and therefore outside the charge to UK tax) as if they had been earned in the UK. The old CFC rules had driven UK headquartered companies into other jurisdictions. In addition, in 2006 HMRC lost a tax case in the ECJ involving Cadbury Schweppes and the IFSC-CFC legislation has been problematic since that.

It is expected that the final changes to these rules will be enacted in legislation in Finance Act 2012. Draft legislation is expected autumn 2011.

According to the consultation document, the Government considers that these proposals will better reflect the way that businesses operate in a globalised economy whilst at the same time protecting the UK tax base against avoidance by:

• targeting and imposing a CFC charge on artificially diverted UK profits, so that UK activity and profits are fairly taxed;
• exempting foreign profits where there is no artificial diversion of UK profits; and
• not taxing profits arising from genuine economic activities undertaken offshore.