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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: What is excluded from non-trading finance profits?: Incidental non-trading profits - the further 5% rule


Where a CFC is a mixed activity CFC it is entitled to an incidental non-trading finance profit safe harbour amount of up to 5% of its trading profits and property business profits and 5% of its exempt distribution income as described at INTM197760.

Where a mixed activity CFC exceeds this combined non-trading finance profit limit, Chapter 5 will nevertheless still not apply if the CFC’s “adjusted non-trading finance profits” are no more than 5% of the total of the CFC’s exempt distribution income. The “adjusted non-trading finance profits” are the CFC’s non-trading finance profits excluding any profits falling within TIOPA10/S371CB(3) and (4) (see INTM197750). It can be seen from this it is necessary first to establish and exclude any amounts as described in INTM197750 and then to determine whether the remaining amount of non-trading finance profit exceeds 5% of the CFC’s exempt distribution income. Where it does all of the non-trading finance profit will fall within Chapter 5.

Therefore, the rule works in the following way.

  1. Determine the non-trading finance profits that fall within subsections 371CB(3) and (4) (see INTM197750).
  2. Deduct (1) from the CFC’s total non-trading finance profits.
  3. If the amount produced by the deduction at (2) is less than 5% of exempt distribution income then all of the CFC’s non-trading finance profits are exempt.
  4. If (2) gives an amount which is more than 5% of exempt distribution income, then that entire amount is within Chapter 5.

The adjusted non-trading finance profits for the test in this section include any CFC subsidiary’s relevant non-trading finance profits which are added to the CFC’s non-trading finance profits as described in INTM197760.