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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - the motive test: The transaction leg of the motive test: are the results of the transaction(s) reflected in the controlled foreign company’s profits for an accounting period?

This is about identifying the transactions that are to be taken into account; namely, those which are reflected in the controlled foreign company’s profits for the accounting period under consideration. It is not necessary that the transaction should be directly between the controlled foreign company and a United Kingdom person. ICTA88/SCH25/PARA16(2)(b) makes it clear that indirect transactions are also to be taken into account.

So, where, for example, there is a transaction between a UK person and a third person and a transaction between that third person and the controlled foreign company, so long as that latter transaction is reflected in the profits of the controlled foreign company, those two transactions are, ‘taken together’, to be taken into account.( ICTA88/SCH25/PARA16). So, the only transactions to which the controlled foreign company is a party that do not fall within this definition are those the results of which are not reflected in the controlled foreign company’s profits. An example might be where a controlled foreign company acts solely as agent for a third party.