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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 - Trading profits: Income condition


The income condition limits the extent to which the income of the CFC can arise from the UK. The intention here is to ensure that the exclusion is available only to CFCs with a relatively small proportion of income from the UK. A high proportion of UK income is a reasonable indication that the CFC has a significant level of operations in the UK. In such cases, the SPF approach is more appropriate.

The income condition is met if relevant trading income derived directly or indirectly from UK persons or UK permanent establishments of non-UK resident companies is no more than 20% of the CFC’s total relevant trading income.

“Relevant trading income” is defined as the trading income of the CFC, excluding UK income from the sale of goods produced in the CFC’s territory of residence.

A separate income condition is provided for CFCs whose main business is banking business which is regulated in the CFC’s territory of residence. This condition sets a 10% UK relevant trading income limit, but excludes from this limit any interest received from UK companies which are connected or associated with the CFC.

This restriction allows banking CFCs to lend funds back to the UK in the ordinary course of their banking business, but to limit other UK income - for example, fee income, to no more than 10% of total trading income.

Neither the general income condition nor the banking income condition cover income which gives rise to a matching expense in a foreign permanent establishment of a UK resident company which has elected for its profits to be exempt under CTA09/S18A (see INTM281000).

The effect of this adjustment is to ensure payments that are taken into account in calculating the profits of an exempt permanent establishment of a UK resident company are not taken into account as if they were UK sourced income.