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HMRC internal manual

International Manual

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Controlled Foreign companies: Entity Exemptions: Chapter 10 - The Exempt Period Exemption: Anti-avoidance

An anti-avoidance rule in relation to the exempt period exemption is set out at TIOPA10/S371JF. The exempt period exemption will not apply if either condition A or B is met.

Condition A

TIOPA10/S371JF(2) sets out Condition A, which is that an arrangement:

  1. is entered into which has a main purpose of securing a tax advantage for any person,
  2. is linked to the potential application of the exemption for one or more accounting periods, and 
  3. involves the CFC either holding assets which give rise to finance profits, or holding intellectual property which gives rise to income.

This condition is intended to target arrangements where groups seek to take advantage of the exemption by placing mobile, income generating assets within the CFC to provide a substantial but temporary source of tax free profits that could be removed before the end of the exempt period.

The definition of “tax advantage” is that contained within TIOPA10/S371VA(1) - “tax advantage” has the meaning given by section 1139 of CTA 2010.

Condition B

TIOPA10/S371JF(3) sets out Condition B, which is that at any time:

  1. an arrangement is entered into which reduces the length of any accounting period to less than 12 months, and 
  2. the arrangement has a main purpose of ensuring that the exemption applies to one or more accounting periods.

This condition is intended to target arrangements whereby the subsequent accounting period is shortened to ensure that the subsequent period condition is met. This condition is not intended to catch changes of accounting date which are commercially driven. The main purpose requirement should ensure that this outcome is achieved.