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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - excluded countries: Meaning of ‘gross amount’ and ‘income’ and ‘gains’

SI1998/3081 Regulation 7(3) and (8)

‘Income and gains’ does not include gains which accrue on the disposal of an asset and which would fall to be treated as a chargeable gain if the controlled foreign company were within the charge to corporation tax and which would not be taken into account in computing the income profits. It includes income items only, such as foreign exchange gains which would be treated as items of income if the company were United Kingdom resident. Additionally it only includes income if it is taken into account in arriving at the commercially quantified income. Thus income that goes straight to reserves is not included nor is income that is treated as a prepayment. Similarly no income is imputed under any transfer pricing provisions.

‘Gross amount’ means that the income in INTM254520 (a) to (d) and (f) above is before the deduction of expenses or reserves. There are special rules to arrive at the ‘gross amount’ of income or gains under (b). First, if certain conditions are met, the figure will take into account the results of currency and interest contracts, where the contract is ancillary to the loan or deposit. The contract must be a derivative contract within the rules in FA02/SCH26. A further condition must be met where the income in (b) arises in a permanent establishment. In that case the currency or interest contract must be entered into by the permanent establishment itself. Secondly, any exchange losses attributable to the loans or deposits in (b) (but before deducting other expenses) are able to reduce the gross amount of income or gains if they have not already been taken into account under the hedging provision. Gains on borrowings by the controlled foreign company will not be included in non-local source income under SI1998/3081 regulation 5(3)(f). The gross amount of income and gains in (c) and (d) (royalties and rents) are the amount of income and gains found after deducting any exchange losses attributable to the royalties or rents referred to in those subparagraphs (but before deducting other expenses).