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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Entity Exemptions: Chapter 14 - The Tax Exemption: Corresponding UK Tax

The corresponding UK tax is the amount of corporation tax which would be chargeable in respect of the CFC’s “assumed taxable total profits” for the accounting period subject to the assumptions and adjustments required by applying the “corporation tax assumptions”. Assumed taxable total profits and the corporation tax assumptions (including the assumption that the CFC is resident in the United Kingdom) are explained in Chapter 19 (see INTM239000). There are also assumptions and adjustments required by TIOPA10/S371NE(2).

Assumptions and Adjustments Required by TIOPA10/S371NE(2)

The assumptions and adjustments required under TIOPA10/S371NE(2) for the calculation of the corresponding UK tax of a CFC are as follows:

  • no double taxation relief (under Part 2 of TIOPA10) should be given in respect of the tax paid by the CFC in its territory of residence (the local tax amount). (Taxes paid in other territories by the CFC will however qualify for double taxation relief under the normal rules in Part 2 of TIOPA, following on from the assumption in Chapter 19 that the CFC is resident in the UK);
  • the amount of the corresponding UK tax should be reduced by;
  • any income tax deducted from payments received by the CFC which would qualify for set-off under CTA10/S967 (applying the corporation tax assumptions), and
  • any income tax or corporation tax actually charged in respect of any income included in the CFC’s assumed taxable total profits. For example, corporation tax charged on the profits of a trade carried on by a CFC through a permanent establishment in the UK.

The reduced amount of tax in accordance with (i) or (ii) above is the amount of the final liability, net of any sum repaid or repayable to the CFC.

The small profits rate provided by CTA10/S18 is available for the purposes of computing corresponding UK tax. However, although under the tax assumptions at Chapter 19 the CFC is assumed to be neither a member of a group or a consortium for the purposes of any provision of the Taxes Acts, this does not affect the number of associated companies to be taken into account under CTA10/S24(3). In practice therefore the small profits rate is unlikely to apply in computing the corresponding UK tax of a CFC. From April 2015 the small profits rate and the main corporation tax rate will be aligned at 20%.

Tax paid in third countries

The local tax paid by the CFC under the law of its territory of residence may take account of third country taxes according to the method of double taxation relief (credit or exemption) which applies in the territory of residence of the CFC and so is likely to be reflected in the amount of tax that is due to be paid by the CFC unless the CFC is not liable to tax in that territory.