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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: examples - locally based traders failing the exempt activities test

Example 5

A subsidiary of a United Kingdom group resident in the Cayman Islands hires out cars for the island’s tourist trade. It receives no other income. The company fails the exempt activities test as its main business is investment business (leasing). However, the facts show that:

  • the main reason for the company’s existence is to hire out cars in the Cayman Islands; and
  • whilst there is a reduction in UK tax by a diversion of profits from the UK, its achievement is not another main reason for the company’s existence.

The diversion of profits leg of the motive test is consequently passed.

Example 6

A subsidiary of a UK group in a low tax territory provides hotel accommodation in that territory. It receives no other income. The company fails the exempt activities test because local law stipulates it must subcontract out certain work to local companies. The facts show that:

  • the main reason for the company’s existence is to provide hotel services in its territory of residence; and
  • whilst there is a reduction in UK tax by a diversion of profits from the UK, its achievement is not another main reason for the company’s existence.

The diversion of profits leg of the motive test is therefore passed.

Example 7

A subsidiary of a United Kingdom group is resident in a low tax territory where it acts in a broking capacity for the group selling financial products to third parties in that territory. It has no other income. Local law specifies that it needs a licence to carry out this activity in the territory and to obtain that licence it must be resident and incorporated in that territory. The facts show that:

  • one of the main reason for the existence of the company is to provide broking services to the group;
  • whilst there is a reduction in UK tax by a diversion of profits from the UK, its achievement is not another main reason for the company’s existence; and
  • whilst transactions between the subsidiary and the UK group have achieved a more than minimal reduction in UK tax, that achievement was not one of the main purposes of the transactions.

Both legs of the motive test are consequently passed.