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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: exemptions - the motive test: The diversion of profits leg of the motive test: United Kingdom company

ICTA88/SCH25/PARA19 (3)

If there is no United Kingdom company actually in existence which could have received the controlled foreign company’s receipts, it may be assumed, if it is reasonable to do so, that such a company would, in the absence of the controlled foreign company, have been established. It cannot be contended therefore on behalf of a controlled foreign company that there is no United Kingdom company which fulfils or could fulfil the same function as the controlled foreign company.

Having made the above assumptions, it has to be decided whether it is reasonable to suppose that the whole or a substantial part of the receipts which are reflected in the controlled foreign company’s profits in the accounting period would have been received by a company or individual resident in the UK.

So the first thing the statute requires is the creation of a fictional scenario - i.e. that the controlled foreign company does not exist. As fictions go, that is not perhaps too difficult a concept. However, it then requires a determination of whether, in its absence and that of any related non-UK company, it is reasonable to suppose that the controlled foreign company’s receipts would have been received by a UK person - including a company which, in the controlled foreign company’s absence it is reasonable to suppose would have been established for that purpose.

It seems unlikely, in such a scenario, that the recipient would be anyone other than the United Kingdom parent - or one of its UK associates. The scenario the statute requires one to consider is one where receipts have been received by a company (i.e. the controlled foreign company) that we are required to assume does not exist. In such a scenario it is unlikely that the receipts will be received by anyone outside the group. The group has, after all earned the receipts and is unlikely to allow their diversion to an outsider. So, the only likely destination is another group company.

The statute then requires, however, an assumption that there are no non-UK group companies that could perform the same function as the controlled foreign company. So, the only likely recipient now becomes a UK group company. The statute pre-empts the potential argument that there is no UK group company in existence that could perform the same function as the controlled foreign company by requiring us to assume that there is one - if that would be reasonable. So, unless there is some reason why a UK company could not receive the receipts, it will always be reasonable to suppose that, in the absence of the controlled foreign company, its receipts would be received by a UK company or individual.

This will only rarely be the case. One example might be where there were restrictions under UK law which would prevent a UK company from receiving the receipts of the controlled foreign company. If that were the case, it might not be reasonable to suppose that a UK person would receive the receipts of the controlled foreign company.

Indeed, it might even be the case where it was the law of the territory in which the controlled foreign company was resident that prevented a United Kingdom company from receiving the receipts of the controlled foreign company. A claim that it was not reasonable to suppose that a UK person would receive the receipts of the controlled foreign company because the law of the territory in which the controlled foreign company was resident prevented a UK company from doing so would have to be looked at very carefully, however. The growth of designer rate regimes in certain offshore jurisdictions demonstrates that some overseas territories are willing to design their laws specifically to enable companies to avoid the controlled foreign company rules. The claim would very likely be unsuccessful in such circumstances.

The answer to the question as to whether a UK person could have received the controlled foreign company’s receipts will therefore nearly always be that it could. It is rare that a UK company will be prevented from carrying out business anywhere in the world.