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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Control: Legal and economic control: The 40% rule


The legal or economic control tests are extended to particular cases where a non-UK resident company is controlled by a UK resident person and a non-UK resident person. This is likely to mostly apply in the case of joint ventures. The non-UK resident company is treated as a CFC if the conditions of the ‘40% rule’ are met. That is, where:

  • two persons (one UK resident and the other non- UK resident) taken together control the company (the controllers);
  • the UK resident controller has interests, rights and powers representing at least 40% of the holdings, rights and powers by which the company is controlled; and
  • the non-UK resident controller has interests, rights and powers representing at least 40% but no more than 55% of such holdings, rights and powers.

40% in this context means 40% of the measure of either legal or economic control, where more than 50% would give a person control of the non-UK resident company and refers to 40% of all the interests, rights and powers of the kind which gives the two persons in question control of the company. The fact that the rule applies only where there are two persons who together control (directly or indirectly) a non-UK resident company does not mean that it does not apply where one of those two persons has the power to control the company on their own. Where, for example, a non-UK resident controller holds 55% of a company and a UK resident controller holds the remaining 45%, the rule will apply and the company will be treated as a CFC, even though on its own the non-UK resident controller might otherwise be considered to have control of the company.