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HMRC internal manual

International Manual

Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: Subsequent period condition

The subsequent period condition requires the CFC to continue as a CFC for at least one accounting period which begins after the exempt period and that there is no CFC charge in relation to the CFC’s first accounting period to begin after the end of the exempt period because:

  1. it has no chargeable profits following application of Chapters 3 to 8 as relevant for that period; or 
  2. one of the other entity exemptions in Chapters 11 to 14 applies for that period.

The rationale for using the first full accounting period after the end of the exempt period is that, provided the CFC is making up 12 month accounts, the subsequent period condition applies by reference to a single accounting period, thereby reducing the compliance burden of claiming the exemption. However a consequence of this approach is that the CFC is potentially given a longer period to rearrange its affairs than the 12 month duration of the exempt period, and that longer period could be up to almost 24 months. But the ‘bridging period’ between the end of the exempt period and the next full accounting period will be subject to the full CFC rules. So if a reorganisation is not complete by the end of the exempt period any profits of that bridging period may well be subject to a CFC charge following application of the CFC rules. This will also be the case where a reorganisation is complete but for some reason in the bridging period chargeable CFC profits do arise.

The subsequent period condition effectively denies access to the exemption if there is no accounting period after the end of the exempt period. Accordingly the exemption will not apply where, for example, the CFC ceases to trade, or where it is sold to non-UK persons. In these cases the normal CFC rules will apply.