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HMRC internal manual

International Manual

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Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: Adjustment of profits passing through the CFC charge gateway

TIOPA10/S371JE deals with cases where a CFC’s accounting period includes part of an exempt period, but where the accounting period does not end during an exempt period. Possible reasons might include a decision to align the CFC’s period of account with the group accounting date, or if the relevant time occurs during a CFC’s accounting period (if a company is already controlled by UK persons, it may well be a CFC before the relevant time, so that the relevant time may not coincide with the start of an accounting period). In these circumstances, the normal CFC rules will apply to the CFC’s accounting period, but any chargeable profits which arise will need to be adjusted to exempt profits which arise during the exempt period. This section is subject to the anti avoidance provision at TIOPA10/S371JF.

TIOPA10/S371JE(1) states that an adjustment will be necessary where an accounting period begins but does not end during an exempt period, and where the chargeable company and subsequent period conditions are met. TIOPA10/S371JE(2) provides that an adjustment to the CFC’s assumed total profits is to ensure that none of the profits which arise during the exempt period are subject to a CFC charge. The profits which arise during the exempt period are to be determined on a just and reasonable basis.

Example

A CFC has an accounting period which runs from 1 January 2014 to 30 June 2014, and thereafter for 12 month periods. An exempt period runs from 1 January 2014 to 31 December 2014. The chargeable profits that are potentially exempt are those relating to the 6 month accounting period to 30 June 2014 and the first 6 months of the accounting period to 30 June 2015.