Multinational Top-up Tax and Domestic Top-up Tax

MTT25500 - Calculating the effective tax rate: Covered tax balance: Controlled foreign company regimes

Under a controlled foreign company (CFC) tax regime, a member may be subject to tax on income earned by a foreign entity (a ‘CFC entity’) in which the member has an ownership interest.

When determining the covered tax balance of each territory for MTT purposes, it may be necessary to reallocate (or ‘push down’) an amount of CFC tax from the owner to the CFC entity.

This is set out in section 179 of Finance (No.2) Act 2023.

See INTM190000+ for guidance on the UK’s CFC regime. Note that the guidance on this page is not specific to the UK CFC regime (see below for the meaning of ‘CFC regime’ for MTT purposes).

Blended CFC regimes

This guidance is not applicable to blended CFC regimes for accounting periods that commence on or before 31 December 2025 and end on or before 30 June 2027.

See MTT25510 for guidance on blended CFC regimes.

Conditions for reallocation

A reallocation of qualifying current tax expense is required where:

• a member ('C') is subject to a CFC regime,
• C has an ownership interest in another member of the group, and
• that member is a CFC entity in relation to C.

Qualifying current tax expense included in the underlying profits accounts of C must be reallocated to the CFC entity to the extent that:

• the tax expense arose in relation to C’s share of the profits of the CFC entity,
• it has not already been reallocated under a different MTT provision, and
• where the expense relates to mobile income, it does not exceed the cap on the reallocation of such expense.

Meaning of ‘CFC regime’

For MTT purposes, a CFC regime is a set of rules under which an entity with an ownership interest in another entity located in a different territory (the 'CFC') is subject to current taxation on its share of part or all of the income earned by the CFC, regardless of whether the income is currently distributed to it.

MTT itself, and foreign equivalents of MTT, are not CFC regimes for this purpose.

Meaning of ‘CFC entity’

For MTT purposes, an entity is a ‘CFC entity’ in relation to a member if it is:

• a CFC of that member,
• a PE of a CFC of that member, or
• an entity whose profits are treated as though they were the profits of a CFC of that member.

Cap on reallocation of tax expense in relation to mobile income

Where some of the qualifying current tax expense to be reallocated relates to mobile income, the amount relating to mobile income that is to be reallocated is capped.

To determine the cap amount for a CFC entity:

• step 1 - Find the effective tax rate of the group for the CFC entity’s territory (ignoring the amount of qualifying current tax expense under consideration).
• step 2 - Subtract that rate from the minimum rate of 15%.
• step 3 - Multiply the result of step 2 by the amount of mobile income to which the tax expense relates.

Where the effective tax rate for the CFC entity’s territory equals or exceeds 15% for the period, no amount of the tax that relates to mobile income will be reallocated.

Amount of tax expense relating to mobile income to be reallocated exceeds the cap

Where the amount of tax expense related to mobile income exceeds the cap amount, only the cap amount is to be reallocated. The remainder will continue to be reflected in the covered taxes of C.

Where:

• an amount of tax expense remains with C because the cap amount was exceeded, and
• the amount relates to income or gains that are not included in the adjusted profits of the CFC entity,

the amount is to be excluded from the covered tax balance of C.

This is in keeping with the normal rule that amounts of covered tax are only included in the covered tax balance where the related income is included in the member’s adjusted profits (see MTT25200).

Mobile income

For this purpose, income is ‘mobile income’ if it is a type of mobile income, and a member of a group is subject to tax on the income:

• under a CFC regime, or
• as a result of an ownership interest in an entity that is regarded as tax transparent in that member’s territory, but is not regarded as transparent in the territory of the entity.

(Note that the member which is subject to a tax may be a member of any multinational group, whether qualifying or not.)

The types of mobile income are:

• dividends or dividend equivalents
• interest or interest equivalents
• rent
• a royalty
• an annuity
• net gains from property that produces income of a type listed above

Domestic Top-up Tax

Amounts allocated to a member are not to be included in the covered tax balance of the member for DTT purposes, in accordance with section 272(8)(b).

The cap on reallocation of tax expense in relation to mobile income does not apply for DTT purposes, in accordance with section 272(8)(d). This has effect for CFC tax expense that is allocated from a UK member to another group member.

Example

F Ltd is a CFC entity in relation to C Ltd. C Ltd is subject to a CFC regime. They are both members of the same group for MTT purposes, and C Ltd has an ownership interest in F Ltd.

In the 2040 period, C Ltd has a CFC charge of 100 in the tax expense line of its underlying profits accounts in relation to its share of the profits of F.

Of this amount, 40 does not relate to mobile income and 60 relates to mobile income of 600. These amounts have not been reallocated to any other member.

In the territory of F, the group has an effective tax rate of 12% (ignoring the CFC charge recorded by C Ltd in relation to the profits of F).

A reallocation is required because:

• C Ltd is subject to a CFC regime,
• C Ltd has an ownership interest in F Ltd, and
• F Ltd is a CFC of C Ltd.

To determine the cap that applies to the mobile profits:

• subtract the relevant effective tax rate of 12% from 15%, to arrive at 3%.
• multiply 3% by the mobile income to which the tax expense relates, which is 600, to arrive at 18.

60 of the tax expense relates to mobile income. Only 18 of this can be reallocated because the remainder is in excess of the cap on mobile income that can be reallocated.

The total amount reallocated is the 40 that does not relate to mobile income, and 18 relating to mobile income.

An adjustment is required for the amount of qualifying current tax expense for C Ltd. The amount of 58 arising to C Ltd in relation to F Ltd should not be reflected in the covered tax balance for the territory of C Ltd.

An adjustment is also required for the qualifying current tax expense of F Ltd. The amount of 58 arising to C Ltd in relation to F Ltd should be reflected in the covered tax balance for the territory of F Ltd.