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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - excluded countries: Purpose of the list

The purpose of this test is to exempt those companies which, because of the territory in which they are resident and the nature of their income, can reasonably be assumed not to be involved in United Kingdom tax avoidance. The income and gains condition - see INTM254500 - is intended to give a rough indication of what the UK tax computation would be. It is for this reason that the commercial profits - see INTM254510 - are taken as the measure, the 10% or £50,000 limit to non-local source income - see INTM254520 - being de minimis figures. In exemption countries, income arising outside the territory may not be taxed in the territory of residence and such income is most likely to be investment or permanent establishment income. It is also investment income that is most likely to give rise to avoidance of UK tax. For these reasons the non-local source income is regarded as investment income.

The relative simplicity of the Excluded Countries exemption has led to its use in an increasing number of avoidance schemes. In order to deny the exemption to users of avoidance schemes whilst allowing genuine business to benefit from the exemption an anti-avoidance avoidance provision was added for accounting periods of controlled foreign companies beginning on or after 31 March 2005 - see INTM254480.