INTM255430 - Controlled Foreign Companies: exemptions - the motive test: Application of motive test: examples - ‘marginal and isolated failure’ of exempt activities and excluded countries exemptions

Example 1

A United Kingdom banking group owns a banking subsidiary in a low tax territory. As part of its activities the subsidiary accepts deposits from third party investors which it lends at interest to its United Kingdom parent.

In its early years of trading it passes the exempt activities test. In year 6, however, it fails that test because, due to a software glitch, it marginally fails to satisfy the conditions of the capital structure test (ICTA88/SCH25/PARA11(3)-(5)).

It is accepted that year 6 is a ‘marginal and isolated failure’ of the exempt activities test and the company passes the motive test for year 6. If such a failure occurred in a future accounting period the company would not pass the motive test on this application of the test as, even if once again marginal, it would not be an isolated failure.

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Example 2

A subsidiary of a UK group acts as the holding company for various associates. It has no transactions with UK associates.

During the accounting period it acquires a trading group from a third party but due to local laws it is only allowed to acquire a maximum 40% of one of the company’s shares within that group in that accounting period (it can only acquire the remaining 60% in the next accounting period). All its income in that earlier accounting period would be made up of qualifying dividends were it not for the fact that dividends from this one company are not from a company which it controls. It therefore fails the exempt activities test.

It is accepted, however, that for that earlier accounting period the company passes the motive test as the failure is a marginal and isolated one.