Chapter 3 of the schedule introduces a set of exempt classes, and the amendments in this group, as we have heard, all act to increase the scope of the exempt classes in various ways. The idea of the exempt classes is to give exemption in circumstances where the risk of avoidance is low. The benefit is that the anti-avoidance rules can be targeted at narrow situations rather than being of general application. That is a significant benefit and I am cautious about extending exempt classes because of the risk of losing some of that benefit.
Amendment 44 would increase the scope of the exempt class for controlled companies in a way that would allow a distribution to fall within an exempt class even if the payer of the distribution was not within the scope of the CFC legislation. That exempt class gives exemption to more than 90 per cent. of dividends by value. It takes a simple and direct route to exemption for controlled companies, which is possible because the CFC rules protect against artificial diversion of profits. The protection reduces the risk that this exempt class might be abused by avoidance schemes and allows it to be free of any other conditions for exemption.
The effect of the amendment would be to allow the rights and powers of a connected foreign company to be taken into account in determining whether the payer of a distribution is a controlled company. Therefore, a distribution paid by a company controlled outside the UKand therefore outside the scope of CFC defencescould be brought within this exempt class, so there is a potential danger of an unacceptable fiscal risk. The attribution was limited to UK companies, and that brought the risk of another EU legal challenge. The extension of that to all companies would have brought unacceptable risks and hence we removed it altogether.