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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax: Introduction

There are four reasons why the chargeable profits of a company not resident in the United Kingdom have to be calculated for Chapter IV purposes:

  • to calculate the amount of its ‘corresponding United Kingdom tax’ (ICTA88/S750(1)) for the purposes of the lower level of taxation test;
  • to establish the amount of profits which is to be apportioned to persons having an interest in the company if an apportionment is due;
  • to ascertain the chargeable profits of a company pursuing an acceptable distribution policy; and
  • to ascertain whether the chargeable profits exceed the de minimis limit (see INTM255100)

Chargeable profits are computed in broadly the same way as the company’s Corporation Tax profits (exclusive of capital gains) would be computed if it were resident in the UK. The assumptions which have to be made to enable chargeable profits to be computed are set out in ICTA88/SCH24. Additionally, ICTA88/SCH24 prescribes a limited number of modifications to the normal Corporation Tax rules. These are necessary to prevent avoidance of tax and to ensure continuity in the computation of chargeable profits since a controlled foreign company may not be subject to an apportionment in each accounting period.

The chargeable profits of an overseas company have to be computed to establish whether it is a controlled foreign company (see INTM254210). For this reason the guidance below refers only to the chargeable profits of an overseas company. It nevertheless applies equally to a controlled foreign company.