MTT25511 - Calculating the effective tax rate: Covered tax balance: Blended CFC regimes - Applicable ETR of a CFC entity

The applicable effective tax rate (ETR) of a CFC entity must be determined in order to apply the blended CFC regime provision. Normally, it will be the ETR of the subgroup of which the CFC entity is a member, determined for the purpose of MTT.

If the CFC is not a member of the group to which the provision is applying, the ETR of one of the subgroups of the group will typically be used as the applicable ETR.

An alternative method is used where no ETR is computed for the territory due to the application of a safe harbour.

In any other scenario (for example, where no ETR is calculated in the territory at all), the applicable ETR will be a notional ETR determined for the purpose of applying the blended CFC regime provision.

This is set out in section 180(8) and 180A of Finance (No.2) Act 2023.

For guidance on subsets of a group, see MTT41500.

Single subgroup in territory

Where the ETR is calculated for MTT purposes for a single subgroup in the territory for the group of the CFC owner (“C”), the applicable ETR of the CFC entity will be that ETR with the following adjustments:

  • ignore any tax arising under a blended CFC regime, and
  • where the blended CFC regime permits foreign tax credit in respect of a Qualifying Domestic Minimum Top-up Tax (QDMTT) on the same basis as it would be permitted for covered taxes, treat amounts of QDMTT so credited as covered taxes.

This will be the case regardless of whether the CFC entity is a member of the group.

Multiple subgroups in territory

Where:

  • multiple ETRs are calculated for at least one subset of the group in the territory, and
  • the CFC is:
    • a member of the group, and
    • a member of one of those subsets,

the applicable ETR will be the ETR of that subset, with the adjustments specified above.

Where:

  • multiple ETRs are calculated for different subsets of the group in the territory, and
  • the CFC entity is not a member of one of those subsets (including where it is not a member of the group at all),

The applicable ETR will be the ETR of the subset whose members collectively have the highest attributable income in relation to the CFC entity. The adjustments specified above are to be made to that ETR.

Where this is not determinative, see “Other scenarios” below.

Transitional safe harbour election applies to territory

Where:

  • C’s group has made a transitional safe harbour election in the territory for the relevant period, and
  • the CFC entity is a member of a subgroup of the consolidated group or a joint venture group, and
  • the ETR of that subgroup is not calculated as a consequence of that election,

the simplified ETR (see MTT15950) should be used as the ETR.

This is the case regardless of which test was used to qualify for the transitional safe harbour.

QDMTT safe harbour election applies to territory

Where C’s group has made the QDMTT safe harbour election for a subgroup in the territory for the relevant period, the ETR will not be calculated for that subgroup. Instead, the following rate is to be taken as the ETR of that subgroup:

  • the aggregate tax expense of that subgroup determined for the purpose of the QDMTT, plus
  • any QDMTT paid,

divided by

  • the income of that subgroup determined for the purpose of the QDMTT.

Other scenarios

In any other scenario (for example, where no ETR is calculated in the territory at all), the applicable ETR of the CFC entity is the notional ETR of the CFC entities in which C has an ownership interest that are located in that territory.

That notional ETR is to be determined as though:

  • those entities were members of a multinational group whose ultimate parent’s accounting period were the relevant period,
  • the net adjusted profits for those entities were the aggregate of their profits and losses before tax as shown in their financial accounts,
  • the combined covered tax balance for those entities were the aggregate of the taxes shown in their financial accounts,
  • any tax arising under a blended CFC regime were ignored, and
  • where the blended CFC regime permits foreign tax credit in respect of a QDMTT on the same basis as it would be permitted for covered taxes, amounts of QDMTT so credited were covered taxes.

Amendment in Finance Act 2025

Section 180 was amended by FA25, and section 180A was inserted by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).