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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - excluded countries: Commercially quantified income

SI1998/3081 Regulations 5(2) and 7(7)

‘Commercially quantified income’ means the amount of pre-tax profits of the controlled foreign company determined in accordance with generally accepted accounting standards but excluding capital profits or losses, For accounting periods beginning on or after 3 December 2004 for a controlled foreign company investing in a non-corporate entity, the income of which is not included in its pre-tax profits determined in accordance with generally accepted accountancy standards, but on which UK tax would have been payable will be treated as part of the income of the controlled foreign company. This will only apply if that entity:

  1. is controlled or is capable of being controlled by the controlled foreign company or the group which owns the controlled foreign company and
  2. receives more than half of its income from other entities which are connected or associated with the controlled foreign company or that group (corporate or otherwise).

Capital profits or losses here mean profits or losses arising in relation to chargeable assets. Chargeable assets are defined in SI1998/3081 regulation 7(7) as assets which, if disposed of by the company and the company were within the charge to corporation tax would have given rise to a chargeable gain or an allowable loss and would not have been taken into account in computing the income profits. By generally acceptable accounting standards is meant acceptable in the territory of the controlled foreign company with the exception of equity accounting.

In certain countries, notably the Netherlands, accounts are prepared on the equity basis of accounting. This means that profits arising in companies which are subsidiaries or in which there is a significant holding, are included in the profit and loss account of the shareholder irrespective of whether those profits have been distributed. Such profits would not be liable to tax if the company were resident in the United Kingdom and the commercially quantified income of such a company may give a false result in quantifying what the United Kingdom tax position might be. Additionally, to the extent that the Dutch tax such income, it will be on distribution only. The regulations therefore require a company whose accounts are drawn up in this way to compute the commercial profits for the purpose of the regulations using another acceptable method so that dividends taken into account in arriving at the commercial profits are shown in the profit and loss account and undistributed profits are excluded.