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HMRC internal manual

International Manual

Controlled Foreign Companies: Entity Exemptions: Chapter 11 - The Excluded Territories Exemption: The Income Condition

A limitation is imposed by TIOPA10/S371KD on the amount of a CFC’s income falling within four categories if it is to qualify for the excluded territories exemption (ETE) (the threshold test). The categories of income, A to D, are explained in detail at INTM224960 onwards.

The threshold test is set at ten per cent of the CFC’s accounting profits excluding transfer pricing adjustments for the accounting period in question, or £50,000 if greater. Accordingly a CFC in a listed territory will be able to have an incidental amount of the total of category A to D income of either £50,000 (proportionately reduced for an accounting period of less than 12 months) or an amount of ten per cent of its accounting profits whichever is the greater. See INTM224950 for what is meant by ‘accounting profits’. Computations are to be made in the local currency of account and the £50,000 limit is to be converted into the local currency at the accounting date.

If the same income falls into more than one of the four categories, then it is counted only once for the purposes of the income condition (TIOPA10/S371KB(4)).