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HMRC internal manual

International Manual

Controlled Foreign Companies: Entity Exemptions: Chapter 11 - The Excluded Territories Exemption: Anti-avoidance

TIOPA10/S371KB(1)(d) sets out the anti-avoidance condition. This is a purpose test of whether the CFC is involved in an arrangement to obtain a tax advantage (as defined by CTA10/S1139) for any person. It will be met if the CFC is not involved in any such arrangement at any time during the relevant accounting period. “Tax advantage” as defined at section 1139 refers to a UK tax advantage which includes the avoidance or reduction of a CFC charge (CTA10/S1139(2)(da)). An arrangement could, for example, include arrangements to convert non-local source income into local source income in order to avoid any restriction of non-local income covered by a notional interest deduction under Category B. Alternatively it could also apply to an arrangement that achieves a UK tax deduction where achieving that tax deduction is one of the main purposes of the arrangement. For these purposes “arrangement” is widely defined at TIOPA10/S371VA (see INTM248100).

The anti-avoidance condition will normally be met where for example low value activities such as data processing are transferred from the UK to, say, India for cost purposes, or where a CFC has non-trading finance profits that are taxable in its territory of residence but which are sheltered by trading losses deductible in that territory. However, in the latter example, the anti-avoidance condition is likely not to be met if non-trading finance profits are deliberately moved into the territory of residence of the CFC in order to take advantage of those losses.