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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): Further conditions


A controlled foreign company which satisfies the requirements set out above will be engaged in exempt activities unless

a) its main business (see INTM254860) during the accounting period in question consists of either

i) ‘investment business’ (see INTM254870), or

ii) dealing in goods for delivery to or from the United Kingdom or to or from connected or associated persons (see INTM254880); or

b) in the case of a company which is mainly engaged in ‘wholesale, distributive, financial or service business’ (see INTM254890), 50% or more of the gross trading receipts of that particular business is derived directly or indirectly from certain companies or individuals (see below).

  • The persons referred to in (b) above are those set out in ICTA88/SCH25/PARA6 (2A); that is: connected and associated persons (as defined by CTA10/S448, CTA10/S882 and ITA07/S993);
  • persons who would have a 25% assessable interest in the company for that accounting period (that is, a person to whom, on an apportionment of chargeable profits, at least 25% of the controlled foreign company’s chargeable profits would be apportioned); and
  • persons connected or associated with certain joint venture partners (that is, where the 40% test in ICTA88/S755D is met)

and for accounting periods beginning on or after 27 November 2002 all

  • UK resident companies;
  • the UK permanent establishments of non-UK resident companies (see INTM254890);
  • individuals who are habitually UK resident (see INTM254890).

For accounting periods beginning before 21 March 2000, these conditions did not apply to a service business that was not a wholesale, distributive or financial business and affiliates did not include those in the third bullet.

Note that the last three bullets refer to unconnected persons.

Notwithstanding the restriction above for companies carrying on ‘investment business’, a company whose main business is to hold shares or securities in subsidiary companies may on certain conditions be regarded as engaged in exempt activities. The detailed conditions are set out at INTM254920 to INTM255050.

The effect of the above restrictions is to prevent investment companies (other than certain holding companies) and companies which have certain types of trading activity as their main business, from satisfying the exempt activities test. Such companies do not therefore qualify for exclusion from Chapter IV under the exempt activities test.