HMRC internal manual

International Manual

INTM225750 - Controlled Foreign Companies: Entity Exemptions: Chapter 13 - The Low Profit Margin Exemption: Introduction

The low profit margin exemption is a relatively simple entity-level exemption which, if applicable for the relevant accounting period of the CFC, means that no CFC charge arises for that period. The exemption applies if the CFC’s accounting profits are (or the profit margin is) no more than 10 per cent of its relevant operating expenditure (as defined for the purposes of the exemption) for the relevant accounting period of the CFC.

There are exclusions from relevant operating expenditure to ensure that the CFC is not used for invoice routing or that operating expenditure is not inflated by intra-group charges.

The low profit margin exemption is subject to an anti-avoidance provision targeting artificial arrangements designed to ensure that the exemption applies to a CFC when, had it not been for the arrangement, the exemption would not have been available to the CFC.

The exemption is aimed at those CFCs that perform substantial (in terms of volume) but relatively low value added functions outside the UK such as:

  • back-office functions,
  • local marketing and distribution operations,
  • toll manufacturing, or
  • call or data- processing centres.

Any CFC that satisfies the low profit margin exemption, does not need to be included in a chargeable company’s corporation tax return.