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HMRC internal manual

International Manual

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

Example 1 - Transfer Pricing Adjustment

A CFC has accounting profits of £470,000. In addition, it has made an interest free loan to a connected party of £10m. Assuming for simplicity that an arm’s length interest rate for such lending was 5 per cent, this would suggest that, had the arrangement been at arm’s length, the CFC would have earned an additional £500,000 of profits. This would mean that the arm’s length profits of the CFC would have been £970,000 as this is the figure of profits after application of the transfer pricing rules in Part 4 of TIOPA10. As this adjusted figure is above the low profits exemption threshold of £500,000, the CFC will not qualify for the exemption.

The reason for this is explained in the basic rule found in INTM225550.

Example 2 - Condition A

A group rearranges its operations to ensure that profits which previously arose in a single CFC are split between three CFCs in different territories. The single company would have generated accounting profits of £900,000 in the accounting period which is above the threshold for the low profits exemption. As one of the main purposes of the arrangement was to ensure that all of the CFCs are able to secure that the low profits exemption applies, it will not in consequence apply to any of the CFCs.

A more detailed explanation of Condition A is found in INTM225600.

Example 3 - Condition B

A UK resident barrister personally provides services in the UK for his overseas portfolio of clients (both individuals and companies) under an arrangement whereby the initial contract of service is between the CFC of a UK resident company that he controls and the overseas clients. In these circumstances the conditions in Condition B will be met and so the low profits exemption will not apply.

A more detailed explanation of Condition B is found in INTM225600.