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HMRC internal manual

International Manual

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HM Revenue & Customs
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How the corporate tax regime works for Controlled Foreign Companies: Clearances: what to include in the application

Precisely what the application should contain will of course depend on the nature of the clearance requested, the extent of the United Kingdom interest and the characteristics of and operations carried on by the controlled foreign company. Consequently it is not feasible to list the information required in all circumstances but the more relevant information provided with the initial application, the more quickly it can be decided. The material required has also been kept intentionally flexible to ensure that the cost of seeking a clearance in any particular case is no greater than absolutely necessary.

Clearance applications are likely to focus on three general areas

  • Are the requirements of the Excluded Countries Regulations complied with? Information in this case would need to be provided to establish commercially quantified income showing what capital items are not included, compute non local source income to show that the requirement at Regulation 5 is satisfied and specify that the controlled foreign company is resident in a Part 1 territory or is not entitled to any of the benefits listed as qualifications to Part 2.
  • Do the activities of the controlled foreign company or the absence of an avoidance purpose exempt it from the requirement to self assess apportioned profits? The Commissioners will need to consider for exempt activities test applications, whether the business establishment and effective management tests are satisfied, what the main business is, and the extent to which trading takes place with connected or associated persons. For holding companies sufficient information will be needed to establish whether the definitions of holding company, local holding company and superior holding company are satisfied, and whether the company derives 90% of its income from acceptable sources and, where applicable, in the appropriate form. Motive test applications will need to be supported by sufficient information to allow the Commissioners to judge whether a reduction in United Kingdom tax has been achieved and if so, whether a main purpose for a transaction or reason for the existence of the company was the achievement of that reduction.
  • How should chargeable profits be apportioned where United Kingdom interest holders do not all have an interest by virtue of a holding of ordinary shares? Once chargeable profits have been established, information would be needed as to the various interest holdings in the controlled foreign company and the basis on which they are held. The objective of the just and reasonable test is to allow a fair apportionment which corresponds as closely as possible to the actual value of the interests held. Information as to why a particular method has been adopted would also be helpful.

HMRC would expect to receive the following information in all applications:-

  1. Name of controlled foreign company
  2. United Kingdom company’s interest in the controlled foreign company’s share and loan capital (by virtue of ICTA88/S749B)
  3. Tax District and reference number of United Kingdom interest holders where known
  4. Territory of residence and details of branches including those in the United Kingdom
  5. Place and, for new companies, date of incorporation.
  6. A copy of the most recent accounts (where these have been drawn up).

The previous notes on clearances contain a short discussion of the kind of information required to allow the Commissioners to consider applications under the exempt activities and motive tests. Items a) to f) above were listed along with the following appropriate to both tests.

  1. Actual or expected equity at beginning and end of accounting period.
  2. Full description of business including all transactions with associates.
  3. Where there is more than one business: which is considered the main business and why.
  4. Details of investments held and actual or projected income from these during the accounting period for which clearance is sought.
  5. Details of projected tax payable for the accounting period for which clearance is sought and how computed.

Of specific relevance to the exempt activities test 

  1. Full details (including address) of business establishment, number of hours, days, etc. occupied on company business, whether shared with other businesses and rent, etc. paid.
  2. Full details of staff employed, place of employment and duties and salaries of each. Details of management companies employed and amounts paid. Details of services provided by the company for persons resident outside the territory of residence and where performed. Details of persons engaged wholly or mainly in the business of the company whose remuneration is paid by a person connected with and resident in the same territory as the controlled foreign company.
  3. Reasons why it is considered the company satisfies the “exempt activities” test.

In the case of exempt activities test holding company applications the United Kingdom interest holder should also provide sufficient information to enable the Commissioners to consider the following -

  1. Whether the controlled foreign company falls within the definition of a holding company or superior holding company at ICTA88/SCH25/PARA12(1) to (6) and ICTA88/SCH25/PARA12A.
  2. Whether the controlled foreign company falls within the definition of a local holding company at ICTA88/SCH25/PARA6(3).
  3. Whether the controlled foreign company derives at least 90% of its income directly or indirectly from controlled local holding companies or companies engaged in exempt activities in the form of non-tax deductible dividends (or, if not, whether the companies are resident in and the income is received in the same territory as the controlled foreign company) - paragraph 6(4) to (4BB) ICTA88/SCH25/PARA6(4) to 6(4BB).

Clearance applications under the motive test should contain in addition to that at a) - k) above:-

  1. Details of any direct or indirect transactions between the United Kingdom and the controlled foreign company. This will include interest on loans (direct or indirect), royalties, payments for services, purchase or sale of goods, etc.
  2. The effect on United Kingdom tax (including the effect on losses or repayments) if those transactions had not taken place.
  3. The reasons for the transactions.
  4. The reasons, if any, why the business of the controlled foreign company could not be carried on by a United Kingdom resident. (A United Kingdom resident includes the overseas branch of a United Kingdom company, a non-United Kingdom incorporated company with its central management and control in the United Kingdom or a United Kingdom incorporated company.)
  5. The tax effect if that business could have been carried on in the United Kingdom.
  6. The reasons for the company’s existence in the accounting period.