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HMRC internal manual

International Manual

Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: When does an exempt period begin?

When does an exempt period begin?

In order to determine whether the exempt period exemption will apply it will be necessary to first determine when any potentially exempt period begins and for how long.

TIOPA10/S371JC(1) provides that an exempt period of a CFC begins at any time (“the relevant time”), during an accounting period of the CFC if:

  1. the “initial condition” is met (see TIOPA10/S371JC(2)),
  2. the “charging condition” is met at the relevant time (see TIOPA10/S371JC (4)), and
  3. the charging condition is not met at any point during the “relevant preceding period” so long as there is such a period (see TIOPA10/S371JC (5)). If the company comes into existence at the relevant time, this condition does not apply.

Initial condition

The “initial condition” set out in TIOPA10/S371JC(2) is met if:

  1. immediately before the relevant time the company which is the CFC is a company carrying on a business, or 
  2. a CFC is formed or incorporated at the relevant time, it is formed or incorporated for the purpose of controlling a company or companies that will qualify for the exemption.

In general, newly formed companies are effectively prevented from accessing the exemption in order to prevent groups claiming the exemption for all new subsidiaries. Acquisition vehicles however are an exception to this general approach and may qualify for the exemption provided the company (X) is formed at the relevant time for the purpose of controlling one or more companies in circumstances where it is expected that the exemption will apply to one or more of those companies at the time when they come under the control of (X). This is intended to cover acquisition vehicles which are set up by a UK group prior to acquiring other companies from a third party.

Charging condition

The circumstances in which the charging condition is met are set out in TIOPA10/Ss371JC(3) and (4). Broadly this is where a CFC has chargeable profits for an accounting period and there is at least one chargeable company in respect of those profits.

Charging condition not met for relevant preceding period

TIOPA10/S371JC(5) defines the “relevant preceding period” as the 12 months immediately prior to the relevant time, but disregarding any part of that period before the company came into existence. The charging condition must not be met for this period for the exemption to apply.

In summary, the exempt period for a company begins at a time when:

  1. it exists immediately before that time;
  2. it is resident outside the UK;
  3. it is controlled by persons resident in the UK; and 
  4. it has at least one chargeable company, and before that time had no chargeable companies for a preceding period of at least 12 months.