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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 3

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.

Company Z decides to send two members of its staff to the UK temporarily, in order to work with Company Y’s staff to try to resolve the legal issues. Working together they negotiate the terms of a compromise agreement with the company that was accused of infringement. Company Z’s two members of staff return to Company Z’s territory of residence with the recommendation that these terms should be accepted and Company Z’s Board of Directors subsequently authorises the settlement.

In considering Condition B it cannot be concluded that Company Y’s activities were under arrangements that unconnected companies would have entered into. Furthermore Company Z’s staff had themselves carried on relevant UK activities by which the IP asset and related risks had been managed to a significant extent.

However in considering Condition C it is concluded that Company Z at all times had the capability to select unconnected advisers to work with it on this issue and to achieve the same outcome. It had been convenient to work with Company Y on this, but not essential. Nor had it been essential that the two members of its staff had stayed in the UK. Again this had just been convenient in working with Company Y. Company Z’s business would have been commercially effective if the assets and risks had stopped being UK managed at any time in the AP because Company Z could have substituted other European legal advisers for Company Y’s staff. Of course something would have been lost in the process of instructing new advisers and not having access to shared group resources, but this does not prevent Condition C from being met in the circumstances.