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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Introduction to the CFC Charge: Steps to be taken for charging the CFC charge.

How to charge the CFC charge is set out in TIOPA10/S371BC which provides details of the steps that need to be taken in order to establish the charge on the chargeable profits i.e. those profits that have passed through the CFC charge gateway. The steps apply to work out who, if anyone, is subject to the CFC charge and subsequently the actual charge for those subject to it, for the CFC’s accounting period.

Step 1 - Determine the persons who have relevant interests in the CFC

Step 1 in determining a CFC charge is to determine the persons (“the relevant persons”) who have ‘relevant interests’ in the CFC at any time during the accounting period. Persons other than UK resident companies may have a relevant interest in a CFC including UK resident individuals and non-UK resident individuals or companies (Refer to Chapter 15 at INTM227000.)

Who has an interest in a company is determined at section TIOPA10/S371VH (see INTM248500). However, not all interests will attract an apportionment of the CFC’s chargeable profits. Instead only persons who have ‘relevant interests’ as defined in Chapter 15 (see INTM227000) may have the CFC’s chargeable profits apportioned to them.

The CFC charge however will only be charged for an accounting period on a relevant person if they are a company and meet the UK residence condition set out at TIOPA10/S371BC(2). The residence condition is met if a company is resident in the UK at a time during the accounting period when it has a relevant interest in the CFC. If there are no such relevant persons, no further steps are to be taken and no CFC charge arises for the accounting period.

The CFC charge therefore will ultimately only apply to chargeable profits of the CFC that are apportioned to UK resident companies that have a relevant interest in the CFC.

Step 2 - determine the CFC’s creditable tax for the accounting period.

It is necessary to determine the creditable tax of the CFC for the accounting period as this will also be apportioned amongst the relevant persons effectively reducing the CFC charge to reflect overseas tax, if any, that may have been paid by the CFC. This is calculated in accordance with Chapter 16 (INTM230000).

Step 3 - apportion the CFC’s chargeable profits and creditable tax for the accounting period

Step 3 requires the creditable tax calculated at step 2 and the chargeable profits of the CFC to be apportioned amongst the relevant persons. The apportionment is determined in accordance with Chapter 17 (INTM233000).

Step 4 - restricts the CFC charge to the relevant interests of chargeable companies

The CFC charge only applies to those relevant persons who are UK resident companies (following step 1) and who meet the definition of a “chargeable company” (see INTM194500) Thus this step applies to limit further persons to whom the CFC charge can apply. If there are no chargeable companies, the CFC charge is not charged for the accounting period and step 5 is not taken.

Step 5 - applying the CFC charge to each chargeable company

The final step is to apply a CFC charge to each chargeable company (as determined at step 4) for the “relevant corporation tax accounting period”. The CFC charge is a sum equal to the ‘appropriate rate’ of corporation tax on ‘P%’ of the CFC’s chargeable profits, less ‘Q%’ of the CFC’s creditable tax

The appropriate rate, P% and Q% are defined at TIOPA10/S371BC(3). The appropriate rate is the main corporation tax rate applicable to the chargeable company’s relevant corporation tax accounting period on which tax is chargeable or an average where there is more than one such rate. P% is the percentage of the chargeable profits of the CFC apportioned to the chargeable company, and Q% is the percentage of the creditable tax apportioned to the chargeable company. These proportions are those that were determined for the purposes of step 3 by Chapter 17 (see INTM233000).

The CFC charge is calculated as if it were an amount of corporation tax charged on the company for the “relevant corporation tax accounting period” which is defined as the chargeable company’s accounting period for corporation tax purposes during which the CFC’s accounting period ends. Note that the CFC charge is calculated as if it were an amount of corporation tax rather than being itself an amount of corporation tax.

When charging the CFC charge, step 5 may be subject to modification in specific circumstances as shown in INTM194750 (shares held as trading assets) and INTM194800 (companies carrying on BLAGAB) .