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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: exemptions - Acceptable Distribution Policy ('ADP'): Currency translation

The ADP exemption was abolished in FA09 for accounting periods of CFCs beginning on or after 1 July 2009. This guidance only applies to APs ending on or before 30 June 2009

Where the accounts of an overseas company are drawn up in a currency other than sterling there is no need to translate them into sterling for the purposes of the acceptable distribution policy. A dividend equalling 90% of the chargeable profits in the foreign currency is payable. The fact that there may be a movement in the exchange rate between the date of the accounts and the payment of the dividend is of no consequence. ICTA88/SCH25/PARA4 does not introduce a parallel test for satisfying an acceptable distribution policy to that in ICTA88/SCH25/PARA2. It simply allows the ‘subsequent dividend’ paid on by an intermediate company to satisfy an acceptable distribution policy. The dividend must still satisfy the requirement in ICTA88/SCH25/PARA2 that it represents 90% of the controlled foreign company’s net chargeable profits in whichever currency it is finally paid.


United Kingdom Ltd, a United Kingdom resident company, holds 100% of the shares in Intermediate Ltd, a company resident in the Republic of Intermedia. Intermediate Ltd owns 100% of the shares in Haven Ltd, a controlled foreign company. Intermediate Ltd prepares its accounts in crowns, the local currency, and Haven Ltd in liras.

Haven Ltd has net chargeable profits of 500,000 liras for the year ended 31st December 2002.

Haven Ltd pays a dividend to Intermediate Ltd on 1s t June 2002 of 450,000 liras. When this dividend is paid there is one lira to the crown.

Intermediate Ltd pays a specified dividend to United Kingdom Ltd on 30 June 2002 of 450,000 crowns. On 29 June 2002, the long-suffering people of Intermedia rise up against their rulers and the crown collapses overnight. On 30 June a crown is worth only half a lira.

The 450,000 crowns paid to United Kingdom Ltd are worth only 225,000 lira. Haven Ltd has not pursued an acceptable distribution policy.

If, instead of a revolution on 29t h June, massive oil deposits had been found in Intermedia and the crown had strengthened to give a rate of two liras to the crown, then Intermediate Ltd need have paid a specified dividend of only 225,000 crowns for Haven Ltd to have pursued an acceptable distribution policy.