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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Apportionment of a CFC’s Chargeable Profits and Creditable Tax: Apportionment to be made in proportion to ordinary shareholdings

The Basic Rules

TIOPA10/S371QC sets out the basic rules for calculating an apportionment. If certain conditions are met, the formulaic approach provided by the first of these rules is adopted. It requires the multiplying together of indirect interests in the CFC through the chain of companies to arrive at the apportionment percentage. If there is more than one chain leading to the same CFC then the relevant interests through each chain are aggregated. If the conditions for the formulaic approach are not met then a just and reasonable approach is to be applied (TIOPA10/S371QC(2)). The rules in TIOPA10/S371QC are elaborated on in TIOPA10/S371QD to S371QF. TIOPA10/S371QC to S371QF are subject to the potential application of the anti-avoidance rule at TIOPA10/S371QG.

There are 3 conditions set out in TIOPA10/371QC(3) to (5) that must be met for the formulaic approach detailed in TIOPA10/S371QD to apply.

  1. Condition X is satisfied if the relevant persons have relevant interests in the CFC only by direct or indirect holdings of ordinary shares in that CFC.
  2. Condition Y is satisfied if each of the relevant persons has been either only UK resident, or only non-UK resident, throughout the accounting period.
  3. Condition Z is satisfied provided that any company with an intermediate interest in the CFC has that interest only from holding, directly or indirectly, ordinary shares in the CFC.

So if the relevant person holds an indirect interest(s) in a CFC through a chain of intermediate companies, all the shareholdings held down to the CFC need to be indirect or direct holdings of ordinary shares for the formulaic approach to apply.

Where the conditions X to Z in TIOPA10/S371QC are met, TIOPA10/371QD applies to apportion chargeable profits and creditable tax to the relevant persons determined by the percentage of the ordinary shareholdings in the CFC represented by their relevant interest.