A CFC, for the purposes of the UK CFC regime, is a controlled company that is tax resident outside the UK and is subject to a tax charge less than 75% of a UK resident company. The controlling UK company is subject to tax on the undistributed profits of the CFC, subject to certain exemptions.

While the new rules represent a significant change in approach for the UK tax authorities, proposing a number of important changes (with further additional draft legislation expected in the next few weeks), transfer pricing practitioners should note the new emphasis on the presence of significant people functions (SPF), for determining whether the non-financial profits of an overseas business should be brought into the CFC regime.

An analysis of SPFs may be required by a company to see if it passes or fails the gateway test, which determines which companies are in the CFC regime. Once a CFC has been identified, the taxpayer is required to perform a full functional analysis to identify the appropriate arm's-length remuneration of the parties.

Per the draft rules, the concept of SPF is defined in line with the OECD paper; Attribution of Profits to Permanent Establishments. Simply put, SPFs are functions that lead to assumption of risk, the ownership of assets or the ongoing management of risks and assets. SPFs are not considered to be the provision of an advisory function or supervisory function (for example, saying yes or no to a proposal) or governance arrangements.

Given the importance of the SPF concept in the new rules and the subjective way that it can be interpreted, it is envisaged that companies will have to seek assistance from transfer pricing specialists (who are used to addressing questions of relative values and importance of differing functional profiles) in order to determine how the CFC regime should be applied for their particular circumstances.

By Wendy Nicholls and Liz Hughes of Grant Thornton UK