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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: Introduction

A non-UK subsidiary of a UK resident company that is newly brought within the CFC rules having been acquired (or returning to the UK and so within the rules again after a period of non-UK ownership) may be allowed a period of time before the CFC rules apply.

The aim of the exempt period exemption is to allow a “new” CFC a period of time to organise or reorganise its business activities so that a CFC charge does not arise. Initially this period will only be a potentially exempt period, because the exemption from a CFC charge during this initial period will be contingent upon whether any CFC charge arises in the next full accounting period.

There are a number of situations in which a group of companies may find some or all of its non-UK subsidiaries subject to the UK’s CFC rules for the first time. Typical examples of this are where a new sub-group is acquired from an overseas third party by a UK headed group, or where a group with an intermediate or ultimate parent that is resident outside the UK moves the tax residence of that parent company to the UK, bringing its non-UK subsidiaries within the scope of the CFC rules. In these circumstances, it is a reasonable assumption that the majority of these non-UK subsidiaries will not be engaged in the artificial diversion of UK profits, or may only need to make minor and commercially rational changes to their activities in order to qualify for exemption from, or otherwise not face, a CFC charge.

The acquisition of a large number of foreign subsidiaries at one time can create a substantial if temporary increase in compliance work and it may be some time before the group’s tax department can complete their analysis of the new subsidiaries’ affairs and the business can make any necessary changes. There is an advantage to both HMRC and businesses in providing a transitional suspension of the CFC rules. Businesses have time to complete their work in an orderly fashion without the threat of inadvertently incurring CFC charges, and HMRC does not need to allocate resource to the short-lived and marginal risk of the artificial diversion of UK profits arising from these potential CFCs.

It will be possible (although unusual) for some potentially chargeable UK companies to get the benefit of the exempt period exemption, whilst others do not. The exemption has to be assessed in relation to each chargeable company, and is therefore different from the other entity level exemptions in Chapters 11 to 14. A chargeable company will only benefit from the exemption if it has a “relevant interest” in the CFC at the beginning of the exempt period and continues to hold a relevant interest until the end of the CFC’s first full accounting period after the end of the exempt period.