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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT'): Local holding companies

ICTA88/SCH25/PARA6(3) and PARA12(2)

A company may qualify as a ‘local holding company’ if it meets conditions which are somewhat stricter than those which apply to other holding companies. The benefits of qualifying as a local holding company are that -

  • the company will (subject to INTM254940) be regarded as carrying on exempt activities, and
  • more importantly, the company may enable its own parent company to satisfy the holding company provisions (see INTM254960).

The general definition of ‘holding company’ is modified in relation to local holding companies. The business of a local holding company must consist wholly or mainly in the holding of shares or securities of trading companies (or a trading company) which are either its 51% subsidiaries (or ‘maximum permitted shareholding companies’ or ‘40/40’ controlled foreign companies). Any part of the company’s business which consists in holding property for use by companies which it controls and which are resident in the same territory as itself may be disregarded. A company may engage in activities other than the holding of shares in trading subsidiaries, etc. and still satisfy this condition provided that its business consists mainly in the holding of such shares.

Additionally, the 90% gross income requirement (see INTM254960) is modified in relation to local holding companies. At least 90% of a local holding company’s gross income in the accounting period under consideration must be received in the territory in which it is resident (i.e. not in an overseas permanent establishment) and must directly derive from companies which it controls and which throughout the period -

  • are resident (see INTM254820) in the same territory as the company itself; and
  • are not themselves holding companies or superior holding companies but are engaged in exempt activities or are exempt trading companies within the terms of ICTA88/SCH24/Part II.

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.

The computation of a local holding company’s gross income is made in accordance with INTM255000 and INTM255010.