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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: Application of motive test: newly-established overseas business

A United Kingdom company which is establishing an overseas business often has the choice of setting up a foreign branch in the overseas territory or of establishing a subsidiary company there subject if necessary to the consent of the Treasury under ICTA88/S765 (for transactions carried out before 1 July 2009).

Where the choice is made to set up a subsidiary, there will nearly always be a diversion of profits from the UK within the statutory definition of ICTA88/SCH25/PARA19. This is because it will usually be reasonable to assume that, if the subsidiary had not been established, its receipts would have accrued directly to the UK company through the foreign branch which would have been set up instead.

That said, the fact that a group chooses to operate in the overseas territory via a locally-resident subsidiary rather than via an overseas branch of a United Kingdom company does not, of itself, automatically mean that the motive test will be failed. As explained above, even where there has been a diversion of profits within the meaning of ICTA88/SCH25/PARA19, it is still necessary to consider whether one of the main reasons for the existence of the subsidiary is to achieve a reduction in tax. Provided that achieving the reduction was not one of the main reasons for its existence, the subsidiary will pass the diversion of profits leg of the motive test.