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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 - controlled foreign company’s profits effectively subject to tax in the United Kingdom

Example 9

An offshore open-ended investment company is controlled by a United Kingdom resident company. The facts show that:

  • the main reason for the existence of the offshore company is to invest in cash and bonds; and
  • the company fails the non-qualifying investment test in FA96/SCH10/PARA8 such that the UK parent’s holding in it is treated under FA96/SCH10/PARA4 as if it were a creditor relationship of the UK resident company and the sum each year chargeable under CTA09/S295 on the UK parent fully reflects the increase in the chargeable profits;

Whilst the existence of the company achieves a reduction in tax by a diversion of profits from the UK, the UK tax charge on the parent demonstrates that the achievement is not one of the main reasons for the company’s existence. The diversion of profits leg of the motive test is consequently passed.