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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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Controlled Foreign Companies: exemptions - excluded countries: Non-local source income

SI1998/3081 Regulation 5(3)

SI1998/3081 regulation 5(3) specifies what constitutes non-local source income:

  1. distributions from companies outside the controlled foreign company’s territory of residence,
  2. gross income and gains on loans or deposits with persons outside that territory of residence or from permanent establishments or agencies outside the territory of residence notwithstanding that the head office is in the same territory of residence as the controlled foreign company,
  3. the gross income and gains received in relation to royalties paid by persons resident outside the territory of the controlled foreign company or by permanent establishments or agencies outside the territory of the controlled foreign company notwithstanding that the head office is resident in the same territory as the controlled foreign company,
  4. the gross income and gains in relation to premiums and rents paid in respect of property situated outside the territory of residence of the controlled foreign company by persons not resident in the same territory as the controlled foreign company or by permanent establishments situated outside the territory of the controlled foreign company notwithstanding that the company is resident in the same territory as the controlled foreign company.
  5. Permanent establishment income. Any income arising in a permanent establishment is included here. This is dealt with in detail below.
  6. The gross amount of any other income (excluding capital gains) received by the controlled foreign company in that period which is treated under the laws of the territory of residence as accruing or deriving from outside that territory or, if there are no such laws, income which would be treated as non-local source income if the laws in that respect in the United Kingdom were to apply to that company. If income is treated under these rules as arising locally and is within the territory’s charge to tax then it will not be treated as non-local source income.
* Income under (a) - (d) is counted only when it does not arise in a permanent establishment of the controlled foreign company. All permanent establishment income is considered separately under (e).
* Income which is part of a fiscal unity (such as in the Netherlands) or a consolidated return (as in the USA) is treated as within the territory’s charge to tax in (f) if it does not accrue or derive from outside that territory and is within the overall charge to tax. Likewise income covered by specific exemptions, such as dividends received from companies resident in the same territory as the controlled foreign company but not taxed because they are paid out of taxed sources, is considered within the charge to tax and therefore excluded from the scope of (f). However transactions with an entity that disappear as a result of consolidation cannot be within the territory’s charge to tax, e.g. consolidation under US rules that treats a limited liability partnership as a ‘US branch’ of the immediate parent.
* For the purposes of SI1998/3081 regulation 5(3) the test of residence is the same test as for the controlled foreign company in SI1998/3081 regulation 2(2) ([INTM254490](https://www.gov.uk/hmrc-internal-manuals/international-manual/intm254490)).
* For accounting periods beginning on or after 3 December 2004 SI 1998/3081 Regulation 5 (3A) specifies additional income to be treated as non-local source income. Where 
  1. the controlled foreign company has entered into one or more transactions with one or more connected or associated persons;
  2. the value to the controlled foreign company of that transaction, or the aggregate value to the controlled foreign company of all those transactions, exceeds fifty per cent of the commercially quantified income of the controlled foreign company; and
  3. the income and gains arising to, or the expenditure incurred by, the connected or associated person as a result of that transaction is taken into account -
i. in computing the controlled foreign company’s profits for tax purposes in the territory in which it resides but not in computing its chargeable profits, or  


ii. in computing the controlled foreign company’s chargeable profits, but not in computing its profits for tax purposes in the territory in which it resides.   

The amount in c(i) or (ii) shall be treated as non-local source income and added to the amounts produced by sub-paragraphs (a) to (f) of paragraph (3) for the purposes of computing the amount of non-local source income.