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HMRC internal manual

International Manual

UK residents with foreign income or gains: corporation tax: Controlled foreign companies: Bricom Holdings Ltd v CIR

The Court of Appeal held in Bricom Holdings Ltd v CIR (70TC272) that the operation of the controlled foreign company (CFC) legislation in ICTA88/S747 is not contrary to the terms of a double taxation agreement, even if the agreement prevents the UK from taxing the income of a CFC directly on the CFC (for example the UK-source interest income of a CFC resident in the Netherlands or the business profits of a CFC which does not have a permanent establishment in the UK). The assumption required by ICTA88/SCH24/PARA1 is that the CFC is resident in the UK instead of being resident wherever it is actually resident. The chargeable profits of a CFC referred to in Section 747(6)(a) must accordingly be ascertained without reference to the agreement and must be measured by reference to the total profits of the CFC. For the purposes of Section 747(3) and (6)(a) the `chargeable profits’ of a CFC do not represent any actual profits of the CFC on which UK corporation tax is chargeable. Rather they are the product of a mathematical calculation made on a hypothetical basis. The income or profits of the CFC which are relieved from UK tax under a double taxation agreement are not themselves included in the sum apportioned to the UK company on which tax is chargeable. They merely provide a measure by which an element in a conventional or notional sum is calculated, and it is this conventional or notional sum which is apportioned to the UK company and on which tax is charged. It follows that a double taxation agreement does not provide for any relief from the tax which is chargeable under the CFC legislation.

For further guidance on the CFC legislation see INTM200000 onwards.