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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - the motive test: Application of motive test: incorporation of foreign branch

A United Kingdom company with an overseas branch may transfer the activities of the branch to a non-resident subsidiary, subject to any necessary consent of the Treasury under ICTA88/S765 (for transactions carried out before 1 July 2009). Such a transfer would represent a diversion of profits as defined in the motive test since the receipts of the new subsidiary would clearly continue to accrue to the UK company if the subsidiary did not exist. In many such cases the new subsidiary will be able to satisfy one of the other exclusions, in particular the exempt activities test, but there will be some cases in which the motive test will need to be considered.

In these cases a decision to incorporate a branch is a matter for the commercial judgement of the company concerned and incorporation is often carried out primarily for commercial reasons. For example, it may be a necessary preliminary to expanding the overseas business or attracting local capital. Whether or not the motive test is passed, however, is a question of fact and HMRC will wish to consider all of the circumstances surrounding the incorporation of the branch. If one of the main reasons for incorporation is to achieve a reduction in UK tax by a diversion of profits from the UK as defined in ICTA88/SCH25/PARA19, the motive test will be failed.