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HMRC internal manual

Tonnage Tax Manual

The ring fence: Controlled foreign companies

CFC operates qualifying ships but is not within paragraph 49

Background – calculating profits of a CFC

TIOPA10/PART9A sets out how to calculate the chargeable profits of a CFC.  Broadly, the chargeable profits are worked out in much the same way as one would work out the profits if it were within the charge to corporation tax.

Calculating the CFC profits of an overseas shipping company

The CFC legislation will apply to an overseas shipping company if any distributions from it (whether or not paid) would not have been ‘relevant shipping profits’ (see TTM06400).

But the normal rules for calculating the chargeable profits of a CFC are adapted (byFA00/SCH22/PARA54) in the case of a CFC which is

  • a member of a tonnage tax group (see TTM12010), and
  • a tonnage tax company by virtue of the group’s tonnage tax election, or would be if it were within the charge to corporation tax.

If both of these conditions are met, the profits of the overseas company are computed for CFC purposes as if it were a singleton tonnage tax company. In particular, any relevant shipping profits are replaced by the tonnage tax profits.

But this does not affect the computation of any other profit assessable under the normal CFC rules.

UK measure of profits

The measure of the CFC’s tax profit under UK rules will therefore be:

  • the tonnage tax profit, plus
  • all profits other than ‘relevant shipping profits’

Computational points

The CFC’s tonnage tax profits should be worked out as if it is a single tonnage tax company (rather than a member of a group). In particular, this means that the 75 per cent test on chartering-in (see TTM05001 onwards) should apply to the CFC on its own account and not bring in ships operated by the rest of the group.

The transfer pricing rules regarding transactions between the overseas company an UK resident members are normally disapplied when computing the UK measure of the CFC’s profits but remain in force as regards any transactions across the tonnage tax ring fence


FA00/SCH22/PARA54 (profits of controlled foreign companies) TTM17311