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HMRC internal manual

International Manual

Controlled Foreign Companies: Residence of CFCs: How to determine the territory of residence of a CFC - the general rule

The CFC is taken to be resident in the territory under the law of which it is liable to tax by reasons of its domicile, residence or place of management at all times during the accounting period.

A CFC is regarded as liable to tax in a particular territory if it is within the charge to tax there even though it may actually pay no tax; for example because of losses or double tax relief, or because, for whatever reason, the tax authorities do not in practice assess or collect the tax for which the company is legally liable. The tax in question must be a tax similar in nature to UK taxes on profits, namely, income or corporation tax. It would not include turnover or payroll taxes, or flat-rate levies.

The legislation refers to “territory” throughout rather than “country”. This is so that it covers jurisdictions such as the Channel Islands and the Isle of Man which do not have full independent status. However, in its application to federal states such as the U.S.A. and Switzerland, “territory” signifies the country and not an individual state.

“Domicile” covers territories which charge companies to tax on the basis of incorporation, registration under their laws or some similar criterion.

“Residence” is to be interpreted in accordance with its meaning in UK tax law; that is the central management and control test. The term is therefore appropriate only to territories with a test of residence similar to the UK test.

“Place of management” covers territories in which liability to tax depends on some particular level of management being carried out in those territories. The term includes many of the criteria for corporate tax liability which are used overseas such as ‘effective management’, ‘seat of business’, ‘central administration’, ‘head office’, ‘principal place of business’ and other similar criteria.