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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: Definition of chargeable profits


The chargeable profits of a company resident outside the United Kingdom are defined as the total profits, computed in accordance with the provisions of ICTA88/SCH24, on which, after taking account of any available deductions, Corporation Tax would be chargeable. ICTA88/SCH24 includes a requirement that a company resident outside the UK should be assumed to be resident in the United Kingdom (ICTA88/SCH24/PARA1(1)) and thus within the charge to corporation tax. The company’s chargeable profits can accordingly be computed as though it is so resident. So, for example, ICTA88/S208 applies to dividends that the controlled foreign company receives from UK companies. Chargeable gains are excluded from chargeable profits but, apart from this, the term ‘profits’ in Chapter IV has the same meaning as it has for the purposes of Corporation Tax, except where the provisions of ICTA88/SCH24 require otherwise.

The definition of chargeable profits has been extended by changes to S747(6) and the addition of S747(7), (8) and (9). The effect of these provisions is to include in chargeable profits income accruing in a trust for which the company is a settlor or a beneficiary. These subsections include measures to avoid taxing the same income twice. The new provisions apply to income accruing on or after 12 March 2008. If the legislation applies and an accounting period of the Controlled Foreign Company straddles 12 March 2008 then that AP is split into the period before and the period on or after 12 March in applying the new legislation.

It was held in Bricom Holdings Ltd v CIR (70TC272) that chargeable profits are a purely notional sum and no part of those profits can be identified as constituting a particular source. For instance where a controlled foreign company is in receipt of UK interest which is included in chargeable profits and there is a subsequent apportionment the sum apportioned cannot be analysed as interest.

Relief for Controlled Foreign Companies resident within an EEA territory effective for accounting periods beginning on or after 6 December 2006

For a CFC within an EEA territory a deduction against apportionable profits may be due on application to the Commissioners for HM Revenue & Customs equal to the net economic value directly created by qualifying work undertaken through a business establishment within that territory.

Further detail can be found at INTM256010 onwards.