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HMRC internal manual

International Manual

Controlled Foreign Companies: Entity Exemptions: Chapter 14 - The Tax Exemption: Example 2

This example illustrates the comparison that needs to be made between the local tax amount and the corresponding UK tax. This example shows where a CFC meets the tax exemption.

The facts are as in Example 1 (see INTM226300) except that in addition the CFC pays withholding tax of £5,000 in respect of royalties received from territory Z for which territory X does not give tax relief. The computation of its corresponding UK tax is now as follows assuming the CT rate is:

£100,000 @ 20% 20,000  
less tax paid in territory Y 11,000  
Less withholding tax paid 5,000  
  4,000 (A)
Tax paid in territory X 3,000 (B)

As the local tax amount of £3,000 is 75% of the corresponding UK tax then the tax exemption applies and there is no CFC charge.