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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC Charge Gateway Chapter 3 - Determining which (if any) of Chapters 4 to 8 apply: Does Chapter 4 apply?: Conditions A to D: Condition A

TIOPA10/S371CA(2) Condition A

Condition A is met if the CFC does not, at any time in the accounting period, hold assets or bear risks under an arrangement that has all of the following characteristics:

  • the main purpose, or one of the main purposes, of the arrangement is to reduce or eliminate any liability of any person to UK tax or duty and the consequence of the arrangement is that at any time the CFC expects its business to be more profitable (other than negligibly so) than it would otherwise be; and
  • the arrangement gives rise to an expectation that one or more persons will have liabilities to tax or duty imposed under the law of any territory reduced or eliminated and it is reasonable to suppose that the arrangement would not have been made if there was not that expectation.

Looking at the second part of Condition A, if as a matter of fact an arrangement under which the CFC holds assets or bears risks has been made with a clear objective expectation of commercial non-tax benefits arising from the arrangement, and these benefits are clearly sufficient on their own for the arrangement to have been adopted, then the condition will be met. The consideration of this point is not necessarily confined to the accounting period in question; for example, the commercial benefits of the arrangement may materialise over a period of time but they should be quantifiable.

In contrast, where the potential for a tax benefit is significant, it will be necessary to consider critically whether the commercial benefit is sufficient to make the arrangement imperative without the tax benefit; i.e. would the commercial non-tax benefit have driven the same arrangement without the accompanying tax benefit. The reference to elimination or reduction of tax or duty here is with reference to tax or duty imposed under the law of any territory and this is consistent with the way that the “economic value” exclusion at TIOPA10/S371DD works (see INTM200600) by excluding all tax effects from the consideration of the commercial rationale behind the arrangement.

If Condition A is met, Chapter 4 does not need to be considered (see example 4 at INTM197390).

If Condition A is not met, then the further Conditions B, C, and D may apply before it is necessary to consider the detailed provisions of Chapter 4 (see example 5 at INTM197400).

‘Arrangement’ has a wide meaning as can be seen at INTM248100.