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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway: Chapter 4 - Profits attributable to UK activities: Exclusions - Independent companies’ arrangements


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 second of these excludes amounts from the provisional Chapter 4 profits where they arise from an arrangement that independent companies would have entered into.

For such amounts to have been included in provisional Chapter 4 profits there will be a separation between UK SPFs and the ownership of assets or bearing of risks. That amount may be excluded if it is reasonable to suppose that if the UK SPFs were not carried out by companies connected with the CFC then the CFC would enter into arrangements with companies it was not connected with and that those arrangements would:

  • be structured in the same way as the actual arrangements; and
  • have the same commercial effect in relation to the CFC’s business.

In order to do this it is necessary to first identify the actual arrangements by which UK SPFs have been separated from a CFC’s ownership of an asset or risk in order to consider whether such arrangements could be replicated with non-connected parties. Arrangement, for this purpose, is defined widely at INTM248100.

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.

The sort of arrangement that would pass this test is a transaction that takes the same form as one observed between independent parties and which gives the same rights, obligations and profit expectation for the CFC as that transaction would. In other words, the test is looking at whether or not such arrangements would commercially have been outsourced.