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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Entity Exemptions: Chapter 13 - The Low Profit Margin Exemption: Example

A CFC’s accounting profits for 2014 show

Sales     3,245,000
Cost of goods sold   (2,545,000)  
Distribution   (55,000)  
Administration   (400,000)  
Operating Expenditure     (3,000,000)
  Interest income     5,000
  Interest expense      
  Accounting profit     100,000  

The cost of goods sold includes 400,000 for goods never delivered into the CFC’s territory of residence. Administration includes a 200,000 charge for services provided by staff of the CFCs parent company.

Applying the rules of the low profit margin exemption the analysis is as follows:

  Operating expenditure 3,000,000    
less Goods not used in territory (400,000)    
less Expense representing income of related person (parent company) (200,000)    
  Relevant operating expenditure   2,400,000  

10 per cent of relevant operating expenditure is therefore 240,000.

  Accounting profit 100,000  
Add Interest expense 150,000  
  Accounting profit before interest deductions 250,000  

The accounting profit before interest is 250,000, which is more than 240,000, so the low profit margin exemption does not apply.