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HMRC internal manual

International Manual

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Controlled Foreign Companies: definitions

Definitions: residence

General

The terms ‘resident’ and ‘residence’ are used in connection with Chapter IV in a number of different senses. The meaning of the terms may vary and care is necessary to establish which of the possible meanings is the one appropriate to the particular context.

Questions of residence arise for the purposes of -

  • determining whether a company is ‘resident outside’ the United Kingdom (ICTA88/S747(1)(a)) - see .
  • determining whether a dual-resident company is controlled by persons resident in the United Kingdom (CTA09/S18) - see .
  • establishing in which territory (if any) a controlled foreign company is resident for the purposes of the lower level of taxation test (ICTA88/S747(1)(c)) - see .
  • establishing in which territory (if any) a controlled foreign company is resident for the purposes of the exempt activities test (ICTA88/SCH25/PARA5(2)(b) - see ; and
  • establishing whether a controlled foreign company is resident in a territory for the excluded countries regulations - see INTM254490.

Resident outside United Kingdom - ICTA88/S747(1)(a)

A company which is resident in the United Kingdom and is therefore liable to Corporation Tax on its world-wide profits cannot be a controlled foreign company. A company should be regarded as resident outside the United Kingdom if it is not resident here or is a treaty non-resident company subject to below. Residence in the United Kingdom is determined either under the ‘central management and control’ test or the incorporation rule in CTA09/S14. A company with dual residence, for instance, one which is resident in this country because its central management and control is situated here and which on some other criterion (such as place of incorporation) is treated by another country as resident there, is not a controlled foreign company unless it is a treaty non-resident company.

Control by persons resident in the United Kingdom - ICTA88/S747(1)(b)

The residence status of the persons who control an overseas company may have to be considered in order to determine whether the company is controlled by persons resident in the United Kingdom. An overseas company should be regarded as controlled by United Kingdom residents if the persons (both individual and corporate) who control it (see INTM254370) are resident in the United Kingdom for tax purposes.

Territory of residence - ICTA88/S747(1)(c) and ICTA88/S749(1)

Rules for determining where an overseas company is resident are necessary to establish whether it is subject to a lower level of taxation (see INTM254380) in its territory of residence and also for the purposes of the exempt activities test (see INTM254800). The objective is to identify a territory which treats the company as resident there under its own laws. The central management and control test is not usually relevant as most foreign jurisdictions have a concept of residence which is not based on central management and control.

Instead, the Chapter IV test is based on the approach commonly adopted in the residence articles of double taxation treaties. The general rule in ICTA88/S749(1) is that a company resident outside the United Kingdom is regarded as resident in the territory in which it is liable to tax on its profits by reason of domicile, residence or place of management throughout the relevant accounting period.

A company would be regarded as liable to tax on its profits in a territory even though it might actually pay no tax there. That may be, for example, because of losses or double taxation 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 United Kingdom taxes on profits, namely, Income or Corporation Tax. It would not include turnover or payroll taxes, or flat-rate levies.

The term ‘territory’ includes jurisdictions which do not have full independent status, for example the Isle of Man and Channel Islands, but does not include the individual states of a federal state such as those of the USA. In computing the local tax both appropriate federal and state taxes should be taken into account.

The term ‘domicile’ covers territories which charge companies to tax on the basis of incorporation, registration under their laws or some similar criterion.

The term ‘residence’ in the phrase ‘domicile, residence or place of management’ can only be interpreted in accordance with its meaning in United Kingdom 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 United Kingdom test.

The term ‘place of management’ covers countries in which liability to tax depends on some particular level of management being carried out in those countries. This 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 any similar criterion.

Residence in more than one territory - ICTA88/S749(2) and (4)

The rule in ICTA88/S749(1) that a company is resident in the territory in which it is liable to tax by reason of domicile, residence or place of management may in some cases result in a company being resident in more than one territory. For example, a company may be liable to tax in one territory because it was incorporated there and in another because it is managed there. ICTA88/S749(2) provides that the following rules will apply in determining which of the candidates is to be regarded as the territory of residence for the purposes of Chapter IV:

  1. If throughout the accounting period the company’s place of effective management is situated in only one of the territories, that is the territory of residence (ICTA88/S749(3)(a)).
  2. If throughout the accounting period the place of effective management is situated in two or more of the countries, the one in which the greater amount of the company’s assets is situated at the end of the relevant accounting period is the territory of residence (ICTA88/S749(3)(b)).
  3. If neither (a) nor (b) above applies (for example, because the company’s place of effective management is outside the countries in which it is liable to tax by reason of domicile, residence or place of management) the territory of residence is the country of residence in which the greater part of the company’s assets is situated at the end of the accounting period (ICTA88/S749(3)(c)).
  4. If none of the above produces a single territory of residence (for example, because all the company’s assets and its effective management are situated outside the territories in which it is liable to tax) the company may make an election to be treated as resident in a territory.
  5. Where an election has not been made within the statutory time limit the Board may designate a territory to be the territory of residence.

In determining in which of two or more territories the greater amount of a company’s assets is situated, account is taken only of the assets situated in those territories immediately before the end of the relevant accounting period. The amount of the assets is to be determined by reference to their market value (ICTA88/S749(6)).

The term ‘place of effective management’ is commonly used in double taxation agreements as a tie breaker to establish a single territory of residence. It looks to the place where a company is actually managed. Usually this will be the place where the company has its central management and control. An exception may be the kind of case referred to in paragraph 22 of the Statement of Practice SP1/90 dated 9 January 1990 on company residence, where a company is run by executive directors in one country who are subject to the final directing power of a controlling board who meet in another country. The place of effective management is likely to be the country in which the executive directors exercise their functions, although, depending on the precise powers of the non-executive directors, central management and control may lie in the other country.

Elections and designations - ICTA88/S749(3)(d) - (e) and (4) - (9) and ICTA88/S749A

An election under ICTA88/S749(3)(d) may be made by any one or more persons who together have a majority assessable interest in the company in that accounting period. The election, which is irrevocable, then has effect for both the accounting period in which it was made and each subsequent period up until the first period in which the territories eligible for the claim differ. The election, once made, is affected by neither a change in the persons with an interest in the company nor a change in their relative interest. The territories eligible for the election differ where the controlled foreign company is no longer resident in at least one of the two territories in which it was liable to tax by reason of domicile, residence or place of management (see ) or the controlled foreign company becomes resident in an additional territory by reason of domicile, residence or place of management (ICTA88/S749(3)(a)). ‘Eligible territories’ for the purpose of an election are territories where the company is either effectively managed or has a majority of assets situated at the end of the relevant accounting period or is liable to tax by reason of domicile, residence or place of management.

For the purposes of making an election, one or more persons together have a majority assessable interest in a controlled foreign company in an accounting period if an amount greater than 50% of the chargeable profits for that period would be apportioned to them on an apportionment and charged to tax. Elections must be:

  • made by notice given to an officer of the Board
  • made within 12 months of the end of the controlled foreign company’s relevant accounting period
  • state the assessable interest (the amount that would be apportioned and charged to tax) of each person making the election
  • signed by the persons making it.

The provision in TMA70/S42 and TMA70/SCH1A do not apply to elections under this section.

Where none of the tests in ICTA88/S749(3) (a) - (c) to find a single territory of residence applies and an election has not been made within the time limit the Board may designate a territory to be the territory of residence. A notice of designation is given to every company resident in the United Kingdom which appears to the Board to have an assessable interest in the controlled foreign company at any time during the accounting period of the controlled foreign company in relation to which the designation is made. The notice specifies the date on which it is made, the controlled foreign company to which it refers, the first accounting period for which it is made and the territory designated. A designation by the Board is irrevocable.

Companies with no territory of residence - ICTA88/S749(5)

The rule in ICTA88/S749(1) that a company is resident in the territory in which it is liable to tax by reason of domicile, residence or place of management will sometimes result in a company having no territory of residence. Some territories (for example, Bermuda) have no system of corporate taxation, some (for example, Jersey) impose no tax on the profits of certain categories of company, while others (for example, Brazil or Hong Kong) impose tax on companies not by reference to domicile, residence or place of management but by reference to the existence of sources of income within the territory concerned. A company could be domiciled and managed at all levels in such a territory without being resident there within the meaning of ICTA88/S749(1). If it were not resident elsewhere, it would not have a territory of residence for Chapter IV purposes.

The main consequence of a company having no territory of residence in this way is that it is conclusively presumed to be subject to a lower level of taxation (see INTM254380). There are, however, special rules which may assign a territory of residence to such a company solely for the purposes of the exempt activities test.

Companies with no territory of residence - Exempt Activities Test - ICTA88/SCH25/PARA5(2)

A single territory of residence for a controlled foreign company needs to be established for the exempt activities test. Where a controlled foreign company has no territory of residence in accordance with ICTA88/S749(5), it may be regarded solely for the purposes of the exempt activities test as resident in the territory in which its business affairs are effectively managed (see INTM254850) provided that -

  • the territory of effective management is outside the United Kingdom; and
  • the territory of effective management is not one in which companies are liable to tax by reason of domicile, residence or place of management (see ).

A controlled foreign company which has no territory of residence but which is effectively managed in a territory which taxes companies on the basis of domicile, residence or place of management is likely to have deliberately arranged not to be resident in that territory in which it would normally be resident. One result of this could be, for example, that it pays no tax on profits arising outside that territory. For this reason it is specifically prevented from satisfying the exempt activities test.

However, the special status given by the People’s Republic of China to the Special Administrative Regions of Hong Kong and Macao led to some doubt as to how these regions were to be accommodated within the Exempt Activities Test, where appropriate. Paragraph 5(3) puts the matter beyond doubt by allowing a company resident in one of these regions to have that region as its territory for the purposes of the Exempt Activities Test. Although introduced by FA03/S201, the paragraph applies retrospectively to the date each Special Administrative Region was formed.

Exceptionally, a controlled foreign company may be effectively managed in more than one territory. In such cases the United Kingdom company or companies having the majority interest in the controlled foreign company (see ) may notify the Board which of the possible territories is to be regarded as the territory of residence for the application of the exempt activities test.

Companies with no territory of residence - Excluded Countries Regulations

For the purposes of the Excluded Countries Regulations (INTM254450) a company which has no territory of residence under ICAT88/S749(1) is treated as resident in the country where it is incorporated.

For accounting periods beginning on or after 3 December 2004 this definition was amended to treat a company as resident in the country where it is incorporated and liable to tax in that territory on its profits.

Accounting periods - ICTA88/S751(2)(b)

The rules for determining a company’s territory of residence are applied by reference to the facts of each separate accounting period. Under ICTA88/S751(2)(b), an accounting period is deemed to end whenever a company becomes, or ceases to be, liable to tax in a territory by reason of domicile, residence or place of management.

An accounting period will end whenever a company -

  1. ceases to be liable to tax in its territory of residence
  2. ceases to be liable to tax in another territory
  3. becomes liable to tax in a new territory of residence; or
  4. becomes liable to tax in a territory other than a new territory of residence.

A company can have only one territory of residence in an accounting period but its territory of residence may be different in a subsequent accounting period.

Treaty non-resident (‘TNR’) companies

A company may be resident in the United Kingdom (whether by virtue of incorporation here or central management and control) and also resident in a second territory under its local law. A Double Taxation Agreement between the United Kingdom and the other territory may contain a ‘tie-breaker’ provision to determine which country has taxing rights. Typically (but not invariably) the ‘tie-breaker’ provision would treat a country in which the company is ‘effectively managed’ as the country of residence for the purposes of the Agreement.

CTA09/S18 provides that any company which is resident in the United Kingdom for the purposes of the Taxes Act and which is also regarded for the purposes of a Double Taxation Agreement as resident outside the United Kingdom shall be treated as resident outside the United Kingdom. From 1 April 2002, FA94/S249 no longer applies for the purposes of any section of the controlled foreign companies’ legislation other than ICTA88/S747(1)(a) (which identifies a non-UK resident company for CFC identification purposes). A TNR parent company will therefore be treated as a UK resident under the controlled foreign companies’ charging provisions and is subject to the assessment and return requirements of Chapter IV.

Special provisions exist where a company concerned was already treated as resident outside the United Kingdom before the 1 April 2002, as a consequence of the operation of a double taxation treaty. Any such cases should be referred to Business International, Outward Investment Team.