INTM550570 - Hybrids: definition of key terms: ordinary income of controlled foreign companies

There are special rules in Part 6A to deal with income of controlled foreign companies (CFCs). Relevant income that has given rise to a charge under the UK’s CFC regime or an equivalent CFC regime outside the UK may be treated as ordinary income of a relevant chargeable company, to the extent set out at s259BD.

A ‘foreign CFC charge’ means a charge which is similar to the UK CFC charge. The UK CFC regime may be characterised by

  • a charge, called the CFC charge, based upon the chargeable profits of the CFC directly or indirectly held by the water’s edge company, and directly attributable to the water’s edge company, on a single entity basis
  • a CFC charge that is not be subject to further reductions, exemptions or repayments, and
  • a CFC charge that does not allow cross entity or cross jurisdictional blending or netting off, whether between CFCs or non-CFCs, including for example, reliefs such as group relief or further reduction by aggregation or consolidation at group or shareholder level

Relevant income

  • is not ordinary income of the CFC, that is, the CFC does not bring the income into account in calculating the income or profits on which it is charged to tax (other than for a CFC charge), or
  • is ordinary income of the CFC that arises from a payment or quasi-payment under, or in connection with, a financial instrument or a hybrid transfer arrangement, but is under taxed

A relevant chargeable company is a company that holds at least a 25% interest in the CFC.

Amendments added Finance Act 2018 - 259BD (12A), (12B) & (12C) were added so that any amounts charged, including those on capital amounts, can be taken into account when determining to what extent amounts of income or profits have been charged to tax under foreign CFC rules.

259BD(12A) enables ‘a qualifying CFC amount’ to be treated as an amount of relevant income of the CFC.

259BD(12B) defines ‘a qualifying CFC amount’.

259BD(12C) disregards any amounts which benefit from exemptions or exclusions, or which relate to CFC charges which are refunded.

Calculating the amount of ordinary income

The amount treated as ordinary income of a relevant chargeable company is determined as follows

Step 1

Determine the amount of relevant income included in the calculation of chargeable profits of the CFC for the purposes of a CFC charge.

If no relevant income is brought into account for the purposes of a CFC charge, no further action is necessary – there is nothing that could be treated as ordinary income of a relevant chargeable company.

Step 2

For each CFC charge, determine the part of the CFC’s chargeable profits apportioned to each chargeable company.

If there are no relevant chargeable companies in relation to the CFC charge, no further action is necessary - none of the relevant income of the CFC can be ordinary income of a relevant chargeable company.

Step 3

For each relevant chargeable company determine the appropriate proportion of relevant income brought into account in calculating profits chargeable under the CFC regime.

The appropriate proportion is the same as the proportion of chargeable profits to each relevant chargeable company under Step 2.

That amount may be treated as ordinary income of the relevant chargeable company.