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HMRC internal manual

International Manual

Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: How long is an exempt period?

12 Months

The basic rule that the exempt period will last for 12 months is set out in TIOPA10/S371JD(1). If the CFC has an accounting period that is less than 12 months then the test will apply by reference to such accounting periods or part accounting periods as add up to 12 months in total.

The most straightforward case will be when a foreign subsidiary becomes a CFC at the relevant time and immediately adopts a 12 month period of account. In this case the CFC’s first accounting period will fully coincide with the 12 month exempt period. The CFC will be treated as exempt in respect of the first accounting period provided that the CFC has no chargeable profits under TIOPA10/Part 9A in respect of the 12 month accounting period immediately following that first accounting period.

Application to extend the 12 month exempt period

Additional rules set out in TIOPA10/Ss371JD (2) to (5) allow chargeable companies to apply for an extension to the 12 month exempt period. In general it is expected that 12 months (i.e. the maximum length of an accounting period) will be sufficient time for the necessary compliance review and reorganisation. However HMRC have the power to extend the period by such further time as is reasonable in appropriate circumstances. In common with other discretionary powers to extend time limits, it would be necessary in the Notice to identify events outside the company’s control to justify an extension of the exempt period.

A notice must be given to HMRC before the end of the exempt period and HMRC will have the power to extend the exempt period or, if necessary, to further extend an extended exempt period. Notices can only be given by companies which would be chargeable companies at that time.