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HMRC internal manual

International Manual

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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 C

Condition C (TIOPA10/S371CA(6))

If the CFC does have UK managed assets or risks, Condition C may be satisfied if the CFC itself has the capability throughout the accounting period to ensure that its business would be commercially effective if those assets and risks were no longer to be UK managed. This can be seen as a test of a CFC’s reliance or dependence on UK management or control - the assumption being that any support or services provided from the UK that amounts to “relevant UK activities” could just as easily be obtained by outsourcing with third parties under arrangements commonly available in the outside world.

The reference to the CFC’s capability includes the capability to select unconnected persons to provide it with goods and services and the capability to manage its transactions with unconnected persons.

As this is an artificial construct, further assumptions are required in determining whether Condition C is met at any time during the accounting period.

The first assumption is that the CFC would continue to carry on the same business as it is actually carrying on at that time. So condition C would not be met if the CFC could only be commercially effective if it made changes in the nature or scale of its business to adapt to the withdrawal of the UK management or control activities.

The second assumption made is that none of the relevant UK activities, by which any asset or risk is UK managed, would be replaced in any way that relies on any person connected with the CFC at any time. So, Condition C would not be met where any of these relevant UK activities are of a type that could not be obtained on a commercial basis at arm’s length. However, it is important to remember that the only relevant UK activities we are concerned with here are those by which Condition B is failed.

If all the relevant UK activities are of a type that could be obtained on a commercial basis at arm’s length then Condition C could be met, as long as the CFC has the necessary capability to select appropriate providers and manage its transactions with them.

The term “commercially effective” includes the CFC being fully competitive, capable of exploiting all its assets efficiently and delivering an appropriate return on the resources invested in it. However, Condition C does not require the CFC to be capable of being no less commercially effective without the UK management or control activities than it has been with them. It is recognised that some synergies or other advantages of working with other group companies would almost certainly be lost under the assumptions required by the test at Condition C. The loss of such advantages would not in itself mean that the CFC is necessarily dependent on the UK management or control activities in the sense of the test. The CFC must have the capability to manage and control the same functions with unconnected parties in order to remain commercially effective. It would not be enough, for example, to retain directors with experience in the appropriate sector but on remuneration that does not reflect the value added by the UK control and management activity. Such directors would not provide the CFC with the capability to select and manage the UK activity when carried out by unconnected persons.

It should also be noted that the test at Condition C is only in relation to UK activities by which the CFC’s assets and risks are managed. Where such activities are carried on elsewhere, for example by a non-UK group company, the non-UK support is not treated as withdrawn for the purposes of the test. Condition C is as test of a CFC’s reliance or dependence on UK management or control (not of its complete self-sufficiency). This does not mean that the test can be satisfied by showing that the relevant UK activities could be carried out by a non-UK group company or any other person connected with the CFC. Although this might be considered a reasonable alternative, it is specifically precluded by the second assumption above.

If Condition C has not been met, and none of Condition A, B, or D have been met then Chapter 4 will need to be considered.

See example at INTM197400.