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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC Charge Gateway Chapter 4 - Profits attributable to UK activities: Exclusions - Economic value


The calculation of the Chapter 4 profit at Step 8 excludes amounts from the provisional Chapter 4 profits as determined by Step 7 where one of three exclusions applies (see INTM200500). The first of these is where substantial economic value, other than UK tax savings, results from the CFC holding specific assets or bearing specific risks as opposed to UK companies connected with the CFC holding or bearing them.

For an amount derived from an asset or risk to be excluded from the provisional Chapter 4 profits both:

  • The net economic value to the CFC group that results from the CFC holding the asset or bearing the risk exceeds what it would have been if UK resident companies connected with the CFC had held the asset or borne the risk, and
  • The relevant non-tax value is a substantial proportion of the excess value identified by the first requirement.

Net economic value for this purpose includes the value of income generated from an asset as well as any increase in its market value that results from arrangements under which it is held, reduced in either case by expenditure incurred in relation to the generation of such value. Any value derived from the reduction or elimination of any liability of any person to tax or duty imposed under the law of any territory outside the UK is excluded from net economic value.

For example, additional to a UK tax saving, holding an asset in the territory of the CFC may give a withholding tax advantage in relation to another state, compared with holding the asset in the UK. This is not relevant to the purposes of the economic value exclusion and is disregarded. The first condition focuses on the non-tax commercial benefits and the UK tax advantage from the CFC holding the asset or bearing the risk against a UK company doing so.

For the second condition, the relevant non-tax value is defined as the part of the value which results from the CFC holding the asset or bearing the risk that does not derive from the reduction of any UK tax or duty.

Overall therefore, non-tax value which results from the CFC holding the asset or bearing the risk is compared to the aggregate of both non-tax value and value derived from the UK tax advantage. The non-tax value must be a substantial proportion the aggregate. Any foreign tax saving effects are disregarded for the purposes of this comparison.

In many cases, it will be obvious that this test is met and so it will not be necessary to work out the numbers. Where it is necessary to work out the numbers, however, HMRC would ordinarily expect 20% of the economic value to be regarded as a substantial proportion of the total.

A bundle of assets or of risks is treated as if it were a single asset or risk for the purposes of this exclusion if it is not reasonably practicable to separate those assets or risks for the purpose of identification of SPFs.

There is no specific reference to the CFC’s accounting period and for the purposes of considering this test it may, in some cases, be appropriate to consider the pattern of activity that has generated profits over time.

However, the test is a test of the net economic value “which results from the holding of the asset, or the bearing of the risk”. This is by reference to what actually happens in the accounting period and not what the intentions of the arrangements were at the time they were entered into or the projections on which they were based.

It may be, therefore, that an amount in relation to a particular asset or risk benefits from the exclusion in one accounting period but not in the next. This could be, for example, because of changes in the CFC’s capabilities between the two periods.

The level of detail required to establish whether an amount should be excluded under this section will vary from case to case. Where, for example, it is claimed that benefits of scale result from the accumulation of IP to a single group “centre of excellence”, it will be necessary to examine the evidence for this carefully in order to establish exactly what the amount of non-tax value and UK tax advantage are.

It may be that in some situations there is little variation, if any, between the factual and functional analysis in one period and the next. In such cases it would not be expected that detailed analysis for each period in which there was no significant change would need to be provided to justify reliance on this exclusion.