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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Entity Exemptions: Chapter 11 - The Excluded Territories Exemption: Meaning of accounting profits: contents

INTM224960 - Restricted income - Category A

INTM224965 - Category A permanent establishment(s) of a CFC

INTM224970 - Restricted income - Category B

INTM224980 - Restricted income - Category C

INTM224990 - Restricted income - Category D

The income condition (see INTM224900) uses a measure of accounting profits rather than assumed taxable total profits in determining whether the threshold test for the total amount of Category A to D income is breached.

Accounting profits for these purposes are defined at TIOPA10/S371VC and TIOPA10/S371VD (see INTM248200). Broadly they are the amount of pre-tax profits of the CFC determined in accordance with generally accepted accounting practice but excluding amounts that would be exempt distributions (under Part 9A CTA 09) in the hands of the CFC if it were a UK tax resident company, property business profits and losses (as defined at TIOPA10/S371VI) and capital profits or losses.

Capital profits or losses here mean realised or unrealised accounting profits or losses that arise from the disposal or revaluation of assets that would be chargeable assets of the CFC if it were UK tax resident. Accordingly accounting profits do not include gains or losses that arise on the disposal of an asset and that would fall to be treated as a chargeable gain or capital loss if the CFC were within the charge to corporation tax, nor any accruals in respect of unrealised gains or losses.

Accounting profits include income items only, such as foreign exchange gains which would be treated as items of income (rather than capital) if the CFC were UK resident. Additionally it only includes income if it is taken into account in arriving at the accounting profits. Thus income that goes straight to reserves is not included nor is income that is treated as a prepayment, although it would be included if and when it is released from reserves. Similarly no income is imputed under any transfer pricing provisions i.e. subsections (7) and (8) of TIOPA10/S371VD are ignored when arriving at accounting profits for the purposes of the excluded territories exemption (ETE).

Similarly, “property business profits and losses” means the accounting profits and losses included in the CFC’s accounts for the accounting period that would be the starting point for the UK tax computation of property business profits and losses under Part 4 CTA 2009.

The measure of accounting profits also includes the following:

  • any amount which accrues during the accounting period to the trustees of a settlement in which the CFC is a settlor or beneficiary; and
  • the CFC’s share of any income that accrues during the accounting period to a partnership of which the CFC is a partner as determined by apportioning that income between the partners on a just and reasonable basis.

For this purpose, “partnership” includes an entity established under the law of a territory outside the UK of a similar character to a partnership. “Partner” is to be read accordingly. Where there is uncertainty as to whether such an entity has a similar character to that of a partnership, the guidance at INTM180030 on entity classification should be referred to in the first instance.

Meaning of gross amounts of income

In Categories A to D (see INTM224960 onwards), references to “gross amounts” of income are to income before the deduction of expenses or transfers to and from reserves. Gross income will therefore include exchange gains but will not be reduced by exchange losses.