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HMRC internal manual

International Manual

Controlled Foreign Companies: EEA states - deduction for net economic value against apportionment: Geographical scope and other defined terms


Geographical Scope

The rules will apply to controlled foreign companies that have a business establishment within another Member State, or another European Economic Area (EEA) State with which the UK currently has relevant legal instruments that provide appropriate procedures for collaboration and exchange of information between national tax administrations. References in this guidance to an EEA state are to a state meeting one or other of these criteria.

Currently, besides other EU Member States, the UK has International Tax Enforcement Arrangements (as defined in FA06/S173) with two other states in the EEA, namely Iceland and Norway. This therefore defines the current geographical scope of the new rules.

Where a controlled foreign company has business establishments in more than one state throughout the accounting period, the scope of the company’s application must be limited to the company’s business establishment(s) in EEA state(s) where the controlled foreign company has individuals working for it throughout the accounting period.

Interpretation of “business establishment”

The term “business establishment” means premises, as defined in ICTA88/SCH25/PARA7. Existing guidance on this term is available at INTM254830.

“Specified amount”

Any application made under ICTA88/S751A must specify the amount by which the controlled foreign company’s profits should be treated as reduced, for the purposes of determining the profits to be apportioned for the relevant accounting period.

The amount specified should be that part of the controlled foreign company’s chargeable profits that the applicant can show represents “net economic value” to the group created directly by the work of individuals working for the company from a business establishment in an EEA state.

HMRC must grant the application if they are satisfied that the whole of the amount specified in the application satisfies the criteria (ICTA88/S751A(4)), so amounts should only be included in the application if the applicant is submitting full evidence with the application to demonstrate that the criteria are satisfied.

“Individuals working for the controlled foreign company”

Individuals working for the controlled foreign company in a state are people employed by the company in that state, or people working there in essentially the same role as an employee of the company. This could include an employee of another group company who is seconded to take up a post in the controlled foreign company in the state, or staff provided by an employment agency to work for the company in the state.

The category of individuals working for the controlled foreign company does not include either self employed individuals, or employees of a contractor contracted to provide services for (or deliver services on behalf of) the controlled foreign company - the value of such work arises to the contractor. Nor does it include any people working in the controlled foreign company in the state (whether or not they are formally employees of the company) who are, in practice, working for, or taking directions from (see final paragraph below), another group company (for example, people based in the controlled foreign company who make transactions on the instructions of the parent company in essentially the same role as an employee of the parent company).

(Clearly, occasionally a parent company may, in its role as controlling shareholder, provide strategic direction to the officers of the controlled foreign company. This, alone, need not prevent those officers being individuals working for the controlled foreign company.)