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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: exemptions - the motive test: The diversion of profits leg of the motive test: would it be reasonable to suppose that the whole or a substantial part of the receipts would have been received by a United Kingdom person?

The second question is nowhere near as straightforward. Indeed, this aspect of the definition has been the subject of a good deal of debate - especially in recent times. This is perhaps unsurprising since the statutory fiction it requires one to create is not straightforward - certainly not as straightforward as that of the transaction leg.

Three assumptions have to be made:

  • first, it has to be assumed that the controlled foreign company did not exist during the accounting period under consideration;
  • second, it has to be assumed that no company ‘related’ (see below) to the controlled foreign company and which could perform the same functions existed during the accounting period; and
  • third, it has to be assumed that, if there is no United Kingdom company in existence that could perform the same functions as the controlled foreign company one would have been established - if it is reasonable to assume it would have been in the absence of the controlled foreign company

Before moving on to consider the consequences of these three assumptions, further explanation of the second and third assumptions is necessary.