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HMRC internal manual

International Manual

Controlled Foreign Companies: Apportionment of a CFC’s Chargeable Profits and Creditable Tax: Anti-avoidance

CFC avoidance can be directed at avoiding the control provisions in Chapter 18 and/or avoiding the apportionment provisions. An example of the latter would be an attempt to engage the formulaic apportionment rule in TIOPA10/S371QC where the ordinary shareholding held by the UK relevant interest holder was, at first sight, under 25% (for example, because of manipulation by arrangements such as circular shareholdings in the CFC).

TIOPA10/S371QG ensures that such avoidance will not work. It does this by adding a further condition to conditions X, Y and Z in TIOPA10/S371QC(3) to (5) to the effect that the formulaic apportionment relating to ordinary shareholdings will not apply in any case where there is an arrangement the main purpose or one of the main purposes of which is to obtain a tax advantage as defined in CTA10/S1139(da), i.e. the avoidance or reduction of a CFC charge.

This will mean that the “just and reasonable” method of apportionment at TIOPA10/S371QC(2) will then be engaged and a just and reasonable apportionment should be made. In apportioning profits in a just and reasonable manner the tax advantage that has arisen from the arrangements should be negated as far as it is practical to do so.