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HMRC internal manual

International Manual

Controlled Foreign Companies: How the corporate tax regime works for CFCs: Clearances: General

Background to the current system

The role of HMRC in providing advice and/or clearances on various aspects of the CFC legislation is recognised as an important practical component of the operation of the system.

What the non-statutory clearance regime aims to do

The regime aims to provide certainty to UK resident companies as to the application of the CFC legislation to a particular set of facts and enable areas of material doubt or difficulty to be resolved before the companies are required to complete the CFC supplementary page to their self assessment tax returns.

The clearance regime allows both flexibility and speed of operation. HMRC will work to a 28 day turnaround target from receipt of the application provided all relevant information is included. If there is a particular need for a clearance decision to be given by a specific date; companies can specify this in their applications. HMRC will do its best to meet reasonable requests but more time may sometimes be needed where for instance particular additional expertise is necessary.

A clearance will state the terms on which it is given and will normally apply indefinitely, provided the relevant underlying facts and legislation remain unchanged. HMRC will be bound by clearances when all the relevant facts are accurately given. Where a clearance cannot be given, HMRC will state the reasons. If a company disagrees with HMRC’s view on a clearance, it will be free to make its self assessment on its own understanding of the law and appeal in the normal way against any amendment to the self assessment.

The continued application of the clearance will be considered by the company’s CCM as part of the group’s annual risk assessment; this may involve a review to ensure that the facts and circumstances remain the same. However companies should notify their CCM if there have been any material changes to the facts or projections in the original application for clearance which may have a bearing on the continued validity of the clearance. Failure to do so may render the UK interest holder liable for penalties under FA07/SCH24/PARA1 if a return is submitted which relies on a clearance which, because of significant changes in the facts or the law, is no longer appropriate.

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To whom the regime applies

All UK resident interest holders are entitled to request clearance in respect of potential CFCs. Where there is more than one resident UK interest holder, a clearance application may be made by one on behalf of the others. Clearances for companies in which venture capital limited partnerships hold shares may be made by the manager of the partnership.

Clearance will not be available on matters that are only indirectly related to the CFC legislation, such as the computation of assumed taxable total profits.

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Matters on which clearances will be considered

Generally an application for clearance should be made when there is genuine material uncertainty about the application of the CFC rules; the application can refer to any part of the legislation. However HMRC will endeavour to consider applications for clearance where there is any uncertainty about the application of the rules (particularly scenarios not covered in guidance) for the first accounting period of a CFC under the new rules commencing in 2013 in view of the significant changes between the old and new CFC regimes.

A clearance application in relation to Conditions A or C of Chapter 3 will not be considered if it is clear that an entity exemption could apply to the CFC.

Clearances will not generally be considered on anonymous cases but applications where a CFC has yet to be incorporated or transactions have not yet been enacted will be considered as long as there is sufficient information to fully understand the proposed structure and so form an opinion and there is a large degree of certainty that the transactions will be undertaken (subject to clearance being given).

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Scope of the clearance

A CFC clearance is a non-statutory clearance and is only given on the basis of the information supplied in the application letter. Therefore it is important to include a full outline of a CFC’s structure and activities in order that an application can be thoroughly reviewed.

Generally a CFC clearance will not be time-limited in any way but all clearances given will be subject to the following conditions:

  • that there are no material changes to the facts and circumstances as set out in the application process;
  • that there are no significant increases in transactions or changes to the activity of a CFC considered in the application process;
  • that there is not a change in the law that would have an impact on the arrangements for which the CFC clearance was given.

Some clearances will be time-limited; for example where it is expected that a CFC’s future activities will change or future transactions significantly increase or where the group has requested clearance that a time-limited exemption such as the Exempt Period Exemption will apply.

Other clearances may be conditional on certain specific conditions being met as well as the general ones above. A specific condition could relate to the amount of incidental non-trading finance profit arising to a CFC in an accounting period where the application may concern the applicability or otherwise of TIOPA10/371CB (profits arising from the investment of funds held by the CFC for the purposes of a trade or property business) or the application of the targeted anti-avoidance rule in the Excluded Territories Exemption.

Exchange of Information

The UK has certain international obligations to exchange information about rulings issued by HMRC. These obligations arise out of bilateral treaties, the EU Directive on Administrative Cooperation in the field of Taxation (the DAC), and Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.  A CFC clearance is an agreement made between a tax authority and a customer, upon which the customer can rely. This makes it a “ruling” for international taxation purposes, meaning it is very likely to be exchangeable with another jurisdiction:


1.     automatically, under BEPS Action 5;

2.     automatically, under the DAC; or

3.     spontaneously, where it would be foreseeably relevant to advise another jurisdiction.


For more information, including whether, when, and how to exchange such rulings: please consult IEIM500000+ onwards.  There may be information that you will need to collect from the customer, so it is important that you review the guidance on sharing rulings before you reply.