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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - the motive test: The diversion of profits leg of the motive test: statutory definition


Again, as with the transaction leg, there are three questions to be answered in relation to the definitional element of the second leg of the motive test:

  1. are there receipts reflected in the controlled foreign company’s profits for an accounting period?
ICTA88/S748(3)(b), ICTA88/SCH25/PARA19(1)  
  1. if the controlled foreign company (and any non-United Kingdom company related to it that could fulfil the same functions) did not exist, would it be reasonable to suppose that the whole or a substantial part of those receipts would have been received by a United Kingdom person (if necessary, a company created for the purpose)?
  1. if it would, would that United Kingdom person have thereby paid more, or been entitled to less relief from, United Kingdom tax such that the controlled foreign company’s existence thereby achieves a reduction in United Kingdom tax?

Again, as with the transaction leg, only if the answer to all of the above three questions is yes, will the existence of a controlled foreign company achieve a reduction in UK tax by a diversion of profits from the United Kingdom. If the answer to any of the questions is no, the diversion of profits leg will not be in point and the motive element need not be considered.