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HMRC internal manual

International Manual

Controlled Foreign Companies: Entity Exemptions: Chapter 12 - The Low Profits Exemption: Anti-Avoidance

TIOPA10/S371LC provides a number of anti-avoidance rules for the low profits exemption. If either of condition A or B is met, the low profits exemption will not be available to the CFC irrespective of its level of profit or non-trading income. If condition C applies, the accounting profits measure of profits cannot be used to determine whether the low profits exemption applies.

Condition A

This condition applies where an arrangement, entered into at any time, has as its main purpose or one of its main purposes to secure that the low profits exemption applies to the accounting period of the CFC or that period and one or more other accounting periods of the CFC where, had it not been for the arrangement, the low profits exemption would not have applied.

This prevents arrangements such as the setting up of multiple CFCs, (each falling within the profits threshold of the low profits exemption), to carry on activities that would otherwise be carried on by one CFC that would, by itself, fail the threshold limit of the low profits exemption. See example 2 at INTM225650.

It also prevents arrangements being made which include a main purpose of sheltering significant amounts of non-trading income by losses in a CFC under the £50,000 or under threshold test for loss-making companies.

Condition B

Condition B applies if, at any time during the accounting period, a CFC’s business is, wholly or mainly, the provision of “UK intermediary services”. See example 3 at INTM225650 

A CFC provides “UK intermediary services” if;

  • a UK resident individual (“the service provider”) personally performs services in the UK for a client, and 
  • these services are provided under an arrangement involving the CFC rather than a contract directly between the service provider and the client.

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Condition C

Condition C provides that no exemption by reference to accounting profits is available if Condition C is met. Condition C applies where, in determining the CFC’s assumed taxable total profit, Part 21B of CTA10 (group mismatch schemes) would have effect so as to exclude an amount from being brought into account as a debit or credit for the purposes of Part 5 of CTA09 (loan relationships) or Part 7 of that Act (derivative contracts).

If the group mismatch rules do apply, the assumed taxable total profits would disregard certain credits and debits that would normally be recognised for accounting purposes. Condition C therefore prevents the accounting profit measure of profits being used to exploit asymmetries in financial transactions between group companies that would be caught by the group mismatch rules applicable to the calculation of the CFC’s assumed taxable total profits for an accounting period.