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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: exemptions - the motive test: The transaction leg of the motive test: reduction in United Kingdom tax more than minimal?

No statutory guidance is given about what level of reduction in United Kingdom tax is to be regarded as minimal and cases should be considered on their individual merits. A reduction in tax which is substantial in absolute terms should not be regarded as minimal because it represents a relatively small proportion of the total liability of the company concerned.

The definition of a tax-reducing transaction is clearly a tight one. It will apply in most cases where a controlled foreign company does business with a UK person and that UK person thereby incurs a tax-deductible expense. This is quite intentional since the transaction leg is, after all, a test of the main purpose(s) of the transaction. All the definition is intended to do is to provide the context in which the main purpose(s) are to be assessed (i.e. the motive element).