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HMRC internal manual

International Manual

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: Example 2

A UK headed group holds intellectual property (IP) in two different companies, one resident in the UK (Company Y) and the other in a zero tax territory (Company Z). Company Y holds patents and related IP for products manufactured and marketed by the group around the world. Company Z holds software which is used by one of the group’s businesses across Latin America and which is also licensed to third parties in Spanish and Portuguese speaking countries.

Company Z has become aware of a potential issue with a European company involving an infringement of its patents. It then learns that a similar issue had come up two years earlier when that same company had infringed patents belonging to another group company - Company Y in the UK. Company Y had successfully defended its IP rights.

Despite the differences between their businesses Company Z asks Company Y to look into the matter for them and to do some initial work under a service agreement made on arm’s length terms.

In considering TIOPA10/S371CA, Company Y’s activities under the service agreement are not seen as “relevant UK activities” as it is reasonable to suppose that unconnected companies would have entered into a similar arrangement. Again, Condition B is met.

Furthermore it is also considered that even if the provision of such advice from the UK constituted “relevant UK activities”, the exploitation of the IP and bearing of the related risks could not be seen as “managed or controlled to any significant extent” by way of these activities. Company Z had to evaluate the advice it received against its specific circumstances and decide for itself how to proceed.