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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - the motive test: Application of motive test: examples - ‘money boxes’

Example 11

A United Kingdom group set up a subsidiary in a low tax territory and puts in a substantial amount of share capital. The subsidiary’s only activities are to place those funds on deposit with a local bank and, when required, to lend funds back to the UK parent at interest. The facts show that:

  • there are no commercial reasons for the existence of the subsidiary;
  • there is a clear reduction in UK tax by a diversion of profits from the UK and its achievement is one of the main reasons for the company’s existence; and
  • transactions between the subsidiary and the UK group have achieved a more than minimal reduction in UK tax, which achievement was one of the main purposes of the transactions.

As such, both legs of the motive test are failed.