Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
, see all updates

Controlled Foreign Companies: Entity Exemptions: Chapter 14 - The Tax Exemption: Example 3

The facts are as in Example 1 (see INTM226300), except that the tax paid in territory X is nil and the tax paid in territory Y is £15,000. The computation of the corresponding UK tax is now as follows:

  £  
     
£100,000 @ 20% 20,000  
less tax paid in territory Y 15,000  
  5000 (A)
Tax paid in territory X nil (B)

The local tax amount of nil is less than three-quarters of the corresponding UK tax and so the CFC fails the tax exemption.

This example emphasises that the comparison to be made is between the corresponding UK tax liability and the tax paid in the territory of the CFC’s residence rather than the total taxes paid by the CFC abroad. Even if a CFC is subject to relatively high rates of tax world-wide, a CFC may still be subject to a lower level of tax in its territory of residence.

It is assumed in the above examples that TIOPA10/S42 requires no limitation of the tax credit to be allowed in respect of the tax paid in territory Y.