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HMRC internal manual

International Manual

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

TIOPA10/S371KJ sets out the Intellectual Property (IP) condition. The IP condition in the excluded territories exemption (ETE) mirrors the IP condition in the trading income exclusion in Chapter 4 (The CFC charge gateway: profits attributable to UK activities - (see INTM200800). Detailed guidance in relation to this condition, for example relating to the meaning of ‘significant’ for the purposes of the significance condition (TIOPA10/S371KJ(3)), is set out in the guidance for Chapter 4 (see INTM200840) . This applies equally for ETE purposes.

Subsections (2)(a) to (d) of TIOPA10/S371KJ provide that the IP condition is met unless:

  • the CFC’s assumed total profits for the accounting period include amounts arising from IP held by the CFC (the “exploited IP”);
  • all or parts of the exploited IP were transferred (directly or indirectly) to the CFC by a related person at any time during the “relevant period” (defined in subsection 5 as the accounting period in question and the preceding six years), or it was otherwise derived, (directly or indirectly), out of or from IP held by a related person at any time during that period;
  • as a result of the transfer or other derivation there has been a significant reduction in the value of the IP held by the related person or persons taken together; and
  • if only parts of the exploited IP were transferred or derived, the significance condition is met.

The significance condition is met if IP which has been transferred or otherwise derived from the UK forms a significant part of the CFC’s total exploited IP, or if the transfer or other derivations of IP from the UK produces CFC profits which are significantly higher than they otherwise would have been.

References to the transfer or holding of IP by a person related to the CFC where that person is non-UK resident is limited to the transfer or holding of IP which was previously held by that person wholly or partly for the purposes of a UK PE. So the focus of the section is on IP transferred or derived from a UK related person.