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HMRC internal manual

International Manual

Controlled Foreign Companies: legislation - introduction and outline: Exclusions from charge

No apportionment of profits is due for an accounting period of a controlled foreign company if during that period the company satisfies any one of the statutory exclusions in ICTA/S748. This does not apply if the Treasury has designated the jurisdiction as one in which all controlled foreign companies would automatically fall within the charge to tax.

In all other cases the exclusions are as follows:

Excluded countries regulations

To fall within the excluded countries exemption a company must be resident in a territory listed in Parts I or II of the Excluded Countries Regulations and satisfy the income and gains requirement set out in SI1998/3081, regulations 4 and 5. INTM254450 gives further information.

Acceptable Distribution Policy

To fall within the acceptable distribution policy a company must pay within 18 months of the end of its accounting period a dividend equal to or greater than 90% of its net chargeable profits (see INTM254650) to persons resident in the United Kingdom. Rules are laid down for computing the profits out of which the dividends have been paid. Restrictions are placed on the payment of dividends out of specified profits and there is a scaling-down of the dividend requirement for certain companies whose shares are partly held by non-residents. There are special rules for controlled foreign companies carrying on insurance business and which use non-annual accounting. The full provisions of the acceptable distribution test are found at INTM254600.

Exempt Activities Test

To satisfy the exempt activities test a company must satisfy three main conditions throughout the accounting period under consideration, namely

  • it must have a ‘business establishment’ in its territory of residence;
  • its business affairs must be ‘effectively managed’ in its territory of residence; and
  • its main business must at no time consist of certain defined activities (for example, investment business).

Additionally, holding companies which satisfy the first two bullet points above and meet certain other requirements, for example, regarding the sources of their income, may satisfy the test. The full requirements of the exempt activities test are set out at INTM254800.

De minimis exclusion

For the de minimis test to be satisfied the chargeable profits of a company must be £50,000 or less in a 12 month accounting period, see INTM255100.

Motive test

A controlled foreign company satisfies the motive test for an accounting period if it meets both of the following conditions

  • where a transaction (or transactions) reflected in the company’s profits in the accounting period has or have achieved a reduction in United Kingdom tax, either the reduction was minimal or it was not the main purpose, or one of the main purposes, of the transaction(s) to achieve that reduction; and
  • it was not the main reason, or one of the main reasons, for the company’s existence in that period to achieve a reduction in UK tax by a diversion of profits from the UK.

More detail about the motive test is given at INTM255150.

Territorial exclusion from exemption

The Treasury has the reserve power under ICTA88/S748A(3) to designate jurisdictions in which all controlled foreign companies would automatically fall within the charge to tax. Any controlled foreign company choosing to carry on business in a designated jurisdiction will be unable to claim any exemption from the controlled foreign companies’ charge. The Treasury will only make regulations with the express consent of Parliament. The exclusion from the exemptions applies to controlled foreign companies’ accounting periods beginning on or after the date on which the regulations were made specifically designating the relevant jurisdiction.