INTM239200 - Controlled Foreign Companies: Assumed Taxable Total Profits, Assumed Total Profits and the Corporation Tax Assumptions: Assumed Taxable Total Profits and Assumed Total Profits

Assumed Taxable Total Profits
Assumed Total Profits
Chargeable Profits

Assumed Taxable Total Profits

TIOPA10/Part 9A/S371SB defines a CFC’s assumed taxable total profits for an accounting period as what would be the CFC’s “taxable total profits” for the accounting period for corporation tax purposes applying the corporation tax assumptions.

Taxable total profits are defined at CTA10/S4(2) as “the profits of a company of an accounting period on which corporation tax is chargeable”.

However, TIOPA10/Part 9A/S371SB(3) provides that for establishing taxable total profits, chargeable gains should be ignored.

The definition of taxable total profits at CTA2010/S4(2) is also modified by subsections (4) to (6) of TIOPA10/Part 9A/S371SB to include the accrued income of a settlement where the CFC is a settlor or beneficiary of the settlement (apportioned on a just and reasonable basis if there is more than one settlor or beneficiary). If the CFC has received an actual dividend or distribution from the settlement, this will be excluded from taxable total profits.

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Assumed Total Profits

TIOPA10/S371SB(9) defines a CFC’s assumed total profits for an accounting period as its assumed taxable total profits for the period before taking step 2 in CTA10/S4(2). Step 2 deducts any amounts relievable from the company’s total profits of the period. Most reliefs such as trading losses or non-trading loan relationship deficits are deducted in arriving at taxable total profits before taking step 2. A few reliefs are given instead against total profits and the one that is mostly likely to be encountered is for management expenses of the CFC.

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Chargeable Profits

Step 2 of CTA10/S4(2) is to be taken in relation to a CFC’s assumed total profits once the extent to which the assumed total profits pass through the CFC charge gateway (Chapters 4 to 8) has been determined. Amounts which can be relieved against the assumed total profits may then be deducted in accordance with step 2 of section 4(2) on a just and reasonable basis having regard to the extent to which the profits have passed through the CFC charge gateway and how the relief relates to these profits (TIOPA10/Part 9A/S371BA(3)(b)) .

A CFC’s assumed taxable total profits are the basis upon which its chargeable profits are calculated (section 371BA(3)). It was held in Bricom Holdings Ltd v CIR (70 TC 272) that chargeable profits are a purely notional sum and no part of those profits can be identified as constituting a particular source. For instance where a CFC is in receipt of UK interest which is included in the calculation of its assumed taxable total profits and there is a subsequent apportionment and CFC charge, the sum apportioned and charged cannot be separated into different components representing say trading income and interest.

The CFC charge arising in respect of the apportioned chargeable profits is not corporation tax but rather is charged on the chargeable company as if it were an amount of corporation tax charged on the company for the accounting period.