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The proposals include:

• An exemption regime for many foreign dividends for large and medium size companies.
• A simplified regime for foreign dividends from small companies.
• A new Controlled Companies regime based on income rather than the ‘all or nothing’ basis of the current Controlled Foreign Companies regime.
• Retention of the interest rules but with stronger anti-abuse provisions.
• Repeal of the requirement for UK companies to obtain Treasury consent before undertaking certain transactions with foreign subsidiaries.

Business has welcomed the ability to charge overseas interest as a legitimate cost against profits but expressed disappointment that small companies will still face problems in receiving dividends from foreign companies. The government is concerned smaller owner-managed companies will be used as personal service companies to avoid tax and ministers say additional anti-abuse rules may be added to ensure the dividend exemption is not abused.

Treasury minister Dawn Primarola said: “This discussion document underlines the government’s commitment to provide the best possible environment for business and to maintain a modern, efficient and competitive business tax regime. The discussions will build on the open and constructive dialogue we have had with business over the past year.”

The Institute of Directors’ head of taxation, Richard Baron, says: “The government is on the right track but there is a danger that when it makes its final decisions it will focus too much on protecting corporation tax revenue and not enough on making the UK a favoured location for multination.”

He criticised the government for putting the question of permanent foreign branches on the backburner, so risking inconsistent solutions for branches and subsidiaries. Consultation ends on 14 September.