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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - the motive test: The conditions of the motive test


No apportionment is due in respect of an accounting period of a controlled foreign company if the conditions of the motive test are satisfied for that accounting period. Because the test looks at the facts of each accounting period separately it is possible for a controlled foreign company to satisfy the test in one period even if it fails it in another.

There are two legs to the test. An apportionment is not due for an accounting period if it is the case that:

  • where a transaction (or two or more transactions taken together) which is reflected in the controlled foreign company’s profits for that accounting period has achieved a reduction in United Kingdom tax, either


  • the reduction was minimal, or
  • it was not the main purpose or one of the main purposes, of the transaction (or transactions) to achieve that reduction;


  • and it was not the main reason, or one of the main reasons, for the company’s existence in that accounting period to achieve a reduction in United Kingdom tax by a diversion of profits from the United Kingdom.

Whether or not the motive test is passed depends on the precise facts of each individual case.