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HMRC internal manual

International Manual

Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax: Assumed residence and apportionment

Assumed residence - ICTA88/SCH24/PARA1(1)

For the purposes of Chapter IV an overseas company has to be assumed to be resident in the United Kingdom. It is as a result assumed to be within the charge to Corporation Tax on its income from all sources (but not on its chargeable gains). Dividends received from United Kingdom resident companies will not therefore be included in chargeable profits where CTA09/S1285 would apply if the overseas company were United Kingdom resident, for distributions paid before 1 July 2009. The company’s assumed residence begins on the first day of the first accounting period for which an apportionment is due or (for AP’s ending on or before 30 June 2009) for which an acceptable distribution policy is pursued and continues until the company ceases to be controlled by persons resident in the United Kingdom (ICTA88/SCH24/PARA2(1)). The assumed residence continues regardless of whether apportionments are due for subsequent accounting periods. It is part of the assumption of United Kingdom residence that the controlled foreign company loses its actual residence. It cannot therefore be either dual resident nor retain its actual residence for the purposes of a claim under a double taxation agreement (Bricom Holdings Ltd v CIR 70TC272).

When a company makes a claim under ICTA88/SCH24/PARA9(3) to bring forward for relief trading losses incurred before the first period for which an apportionment is made (see INTM255760) the company’s assumed residence runs instead from the beginning of the first accounting period for which the losses claimed were actually incurred.

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Assumed apportionment - ICTA88/S750(3)

An overseas company’s chargeable profits and corresponding United Kingdom tax for an accounting period need to be calculated to determine whether an apportionment is due for that period. To enable the computation to be made it is assumed that an apportionment falls to be made for that period.

Where a company-

  1. has not been subject to a direction or an apportionment in a previous accounting period, or
  2. has not pursued an acceptable distribution policy in respect of a period beginning on or after 28 November 1995, and ending on or before 30 June 2009, or
  3. has not made a claim under ICTA88/SCH24/PARA9(3) in respect of a previous accounting period, or
  4. has not been subject to a declaration under ICTA88/SCH24/PARA11(3) in respect of a previous accounting period, or
  5. has ceased to be controlled by persons resident in the United Kingdom at some stage since the previous accounting period referred to in (a)-(d) above (with the consequence that the company is no longer assumed to be continuously resident in the United Kingdom - see Example below)

the chargeable profits of the company are computed as though it became resident in the United Kingdom at the beginning of the accounting period in question but it is not assumed to be resident in any previous period (ICTA88/SCH24/PARA2(1)). If, in the event, no apportionment is due for the accounting period for which the chargeable profits have been computed, and (for APs ending on or before 30 June 2009) an acceptable distribution policy is not pursued the assumption of residence for that period is disregarded in computing chargeable profits for any subsequent period (see Example below).

Where none of (a)-(e) above applies, a company is assumed to have been continuously resident in the United Kingdom from the earliest accounting period for which a direction was made, or, if no such direction was made, from the first accounting periods beginning on or after 28 November 1995 and ending on or before 30 June 2009 for which an acceptable distribution policy was pursued. The computation of chargeable profits is made on the assumption that a similar computation has been made for each subsequent accounting period (ICTA88/SCH24/PARA2(2)) regardless as to whether an acceptable distribution policy was pursued or apportionment made. In this way continuity is preserved, for example capital allowances and trade losses may be carried forward under ICTA88/S393(1) in the normal way, even if apportionments or acceptable distributions are not made for all the intervening periods.

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Example

  1. Lusson Ltd is a non-resident company.
  2. For the year to 31 December year 1 - the company is assumed to be resident in the United Kingdom in order to work out the chargeable profits.
* The company is not subject to a lower level of taxation (see [INTM254380](https://www.gov.uk/hmrc-internal-manuals/international-manual/intm254380)).
  1. For the year to 31 December year 2 - the company is assumed to be resident in the United Kingdom (but not in the previous year) in order to work out the chargeable profits.
* The company is subject to a lower level of taxation but an apportionment is not due because the company is carrying on exempt activities.
  1. For the year to 31 December year 3- the company is assumed to be resident in the United Kingdom (but not in the previous two years) in order to work out the chargeable profits.
* The company is subject to a lower level of taxation and an apportionment is due.
  1. To work out the chargeable profits for future accounting periods, Lusson Ltd is assumed to become United Kingdom resident on 1 January year 3.
  2. Continued residence is assumed until Lusson Ltd ceases to be controlled by United Kingdom residents.

Deemed change of residence during an accounting period

Where a company is deemed to become, or ceases to be, resident in the United Kingdom on a date which is not the date to which its accounts are drawn up, the profits of the period of account straddling the date on which residence status changes will have to be apportioned. Profits of the whole period of account may where necessary be apportioned to the periods of non-residence and residence on a time basis. However, it is preferable to establish the true profit of the period of deemed residence by reference to transactions etc of that period, where this can be done at reasonable cost.