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HMRC internal manual

International Manual

Controlled Foreign Companies: Introduction to the CFC rules: Comparison with previous CFC legislation

Comparison with previous CFC legislation

Compared with the previous CFC legislation the definition of a CFC has changed. Within Part 9A of TIOPA 2010 any controlled foreign company is a CFC, but there is an exemption for CFCs that do not pay a low rate of tax. This is in contrast to the previous rules where a lower level of tax was part of the definition of a CFC.

There are still ‘entity level’ exemptions, which if they apply will exempt all the profits of a CFC from the CFC charge. These are:

  • Exempt period for foreign companies becoming CFCs for the first time - See INTM224100
  • Excluded territories for CFCs resident in certain territories, subject to conditions - See INTM224700 
  • Low profits for CFCs with low levels of profit - See INTM225500
  • Low profit margin for CFCs whose profit is a small margin above certain defined expenditure - See INTM225700
  • Tax exemption for CFCs that pay at least 75% of the tax they would have paid in the UK - See INTM226000

An important change from earlier legislation is that, even if the above exemptions do not apply, the CFC charge will apply only to those profits that are identified by the legislation as being within the scope of the CFC charge. The process of identifying ‘chargeable profits’ of the CFC is called the ‘CFC charge gateway’ (see INTM197000).

There are partial and full exemptions available for profits derived from intra group lending to foreign borrowers (see INTM216000).

There are also certain exemptions that apply to UK interest holders that meet certain conditions - these are mainly for offshore funds and for CFCs whose shares are held as trade assets (see INTM194600).