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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): The Exempt Activities Exemption


The purpose of the exempt activities test is to exclude from Chapter IV those controlled foreign companies which, because of the nature of the activities in their territories of residence, can reasonably be assumed not to be used for reducing United Kingdom tax.

The exclusion covers a wide range of trading activities and certain types of holding company. Most of the overseas subsidiaries of UK groups (especially those which carry on a trade) are likely to satisfy the test. However, the conditions are strict and companies carrying on particular types of trade will not be able to secure exclusion under the test and will have to be considered under one of the other exclusions. Failure of the exempt activities test does not of itself imply that the controlled foreign company is being used to reduce UK tax.

To satisfy the exempt activities test for an accounting period a controlled foreign company must satisfy all of the following conditions:

  1. It must have a territory of residence for the purposes of the test (see INTM254820).
  2. It must have a ‘business establishment’ in its territory of residence throughout the accounting period (see INTM254830).
  3. It must be ‘effectively managed’ in its territory of residence throughout the accounting period (see INTM254840).
  4. It must not have as its main business any of the activities precluded by the terms of ICTA88/SCH25/PARA6(2) (see INTM254850 to INTM254890 ) unless it is a holding company which satisfies the requirements set out at INTM254920 to INTM255050.

If a controlled foreign company satisfies the exempt activities test it is excluded from the scope of the Chapter IV charge altogether. The legislation does not permit the apportionment of part only of a company’s profits, for instance the part represented by the investment income of a trading company.

In addition to the rules which apply to trading, investment and holding companies generally, ICTA88/SCH25/Part II contains provisions which relate specifically to banks and similar businesses (INTM254900) and insurance companies (INTM254910).

There are a number of references in ICTA88/SCH25/Part II to control and to connected or associated persons. Until the relevant part of it was repealed by FA00, ICTA88/S756(3) applied the definition of ‘control’ in ICTA88/S416 and ICTA88/S417 applied to interpret ICTA88/S416. From 21 March 2000, ICTA88/S755D contains a definition of control specific to Chapter IV (see INTM254360 to INTM254370). ICTA88/S756 (2) and (what remains of) ICTA88/S756(3) continue to apply the definitions of ‘connected persons’ and ‘associated persons’ in ICTA88/S417, ICTA88/S839 and ICTA/S783(10) for the purposes of Chapter IV (which includes the Schedules).

It is recognised that there may be occasions where information about the Controlled Foreign Company may not be available or the time it would take to verify beyond any doubt that the Controlled Foreign Company satisfies all of the conditions for the exemption would be disproportionate. In these circumstances, see INTM256620 for further guidance.