The Inland Revenue is clamping down on UK companies using their offshore subsidiaries to avoid taxation.
The crackdown on "controlled foreign companies" is part of a wider campaign by the Revenue to recoup the estimated £1bn a year it losses to harmful tax administrations.
The legislation aims to counter so called "designer rate tax regimes" in Ireland plus the British dependent territories of the Channel Islands, Gibraltar and the Isle of Man.
The purpose of the clampdown on CFC legislation is to stop UK firms diverting income to a more preferential regime. Current rules require UK companies to pay an CFC tax equal to any tax avoided through use of their offshore subsidiary.
Companies are seen to be in a tax haven or preferential regime if they are subject to a rate of tax less than 75 per cent of the UK equivalent. The new legislation sets aside this requirement.
Offshore financial services subsidiaries are likely to bear the brunt of the new legislation which takes immediate effect, although it is not formally introduced until next years budget.
The Revenue cites Jersey as an example where companies can use the favourable regime to avoid paying higher taxes claiming that by taxing different types of income at rates varying from 2 to 30 per cent. It allows companies can adjust their income to determine their tax rate.
Isle of Man Treasury chief financial officer John Cashen says: "The UK Government has tightened these rules on several occasions so this is no surprise. But it will effect some element of our revenue."
A Treasury source says: "The Government has always been against unfair and artificial tax practises and will certainly not put up with them in our own backyard."