Controlled Foreign Companies: Entity Exemptions: Chapter 13 - The Low Profit Margin Exemption: Example
A CFC’s accounting profits for 2014 show
|Cost of goods sold||(2,545,000)|
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:
|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 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.