371KE Category A income: the basic rule

(1) A CFC’s category A income for an accounting period consists of any
gross amounts (that is, amounts before deduction of expenses or
transfers to or from reserves) of any relevant income to which
5subsection (3), (4) or (5) applies.

This is subject to section 371KF.

(2) “Relevant income” means any income of the CFC which—

(a) is brought into account in determining the CFC’s accounting
profits for the accounting period, or

(b) 10is not so brought into account but arises in the accounting
period.

(3) This subsection applies to any relevant income (apart from any
dividend or other distribution of a company) so far as it is exempt
from tax in the CFC’s territory.

(4) 15This subsection applies to any relevant income so far as the tax which
falls to be paid in respect of the relevant income in the CFC’s territory
is at a reduced rate by virtue of a provision having effect under the
law of that territory the purpose of which is (wholly or mainly) to
encourage (directly or indirectly) investment in that territory.

(5) 20This subsection applies to any relevant income if—

(a) any tax falls to be paid in respect of the relevant income in the
CFC’s territory,

(b) under the law of that territory, the CFC, any person who has
an interest in the CFC or any person connected with the CFC
25is entitled to any repayment of tax or any payment in respect
of a credit for tax, and

(c) that repayment or payment—

(i) is directly or indirectly in respect of the whole or part
of the tax mentioned in paragraph (a), but

(ii) 30is not a form of relief in respect of losses incurred by
the CFC.

371KF Category A income: permanent establishments in excluded territories

(1) This section applies if—

(a) a CFC’s category A income for an accounting period would
35include (apart from this section) the gross amount of any
relevant income which arises from the activities of a
permanent establishment (“PE”) which the CFC has in a
territory outside the CFC’s territory, and

(b) the territory in which PE is established is an excluded
40territory.

(2) The gross amount of that relevant income is to be included in the
CFC’s category A income only so far as it would also have been
included had the references in section 371KE(3) to (5) to the CFC’s
territory instead been references to the territory in which PE is
45established.

371KG Category B income

(1) A CFC’s category B income for an accounting period consists of any
notional interest which—

(a) is deducted from any of the CFC’s relevant income for tax
5purposes under the law of the CFC’s territory or any territory
in which the CFC has a permanent establishment, but

(b) is not deducted in determining the CFC’s assumed taxable
total profits for the accounting period.

(2) But the CFC’s category B income is not to exceed its relevant non-
10local income.

(3) “Notional interest” means an amount representing a notional
interest expense or other financing charge calculated by reference to
any of the CFC’s equity or debt.

(4) “Relevant income” has the same meaning as in section 371KE.

(5) 15“Relevant non-local income” means the gross amount (that is, the
amount before deduction of expenses or transfers to or from
reserves) of any non-trading income—

(a) which is included in the CFC’s relevant income, and

(b) which is received (directly or indirectly) from—

(i) 20a person resident outside the CFC’s territory, or

(ii) a permanent establishment which a person resident
in the CFC’s territory (apart from the CFC itself) has
in a territory outside the CFC’s territory.

371KH Category C income

25A CFC’s category C income for an accounting period is the total of
the following amounts—

(a) amounts included in the CFC’s accounting profits for the
period which fall within section 371VD(4)(a) (whether or not
those amounts would have been included in those profits
30apart from section 371VD(4)(a)), and

(b) amounts included in those profits by virtue only of section
371VD(4)(b).

371KI Category D income

(1) A CFC’s category D income for an accounting period consists of the
35gross amounts (that is, the amounts before deduction of expenses or
transfers to or from reserves) of any income which—

(a) is brought into account in determining the CFC’s accounting
profits for the accounting period, and

(b) is to be included in the CFC’s category D income in
40accordance with subsection (3) or (4).

(2) Subsection (3) applies if—

(a) income arises from any provision made or imposed by means
of an arrangement as between the CFC and any company
connected with the CFC,

(b) 45in the CFC’s territory, the income is reduced by an amount
(“the relevant amount”) for tax purposes on the basis that the

income is more than what it would have been had the
company connected with the CFC not been connected with
the CFC, and

(c) there is not in any territory a corresponding increase for tax
purposes in the income of a company connected with the
5CFC.

(3) The relevant amount is to be included in the CFC’s category D
income.

(4) Income is to be included in the CFC’s category D income so far as the
tax which falls to be paid in respect of the income in the CFC’s
10territory is at a reduced rate by virtue of a ruling or other decision or
an arrangement made in relation to the CFC by a governmental
authority in that territory.

371KJ The IP condition

(1) This section applies for the purposes of section 371KB(1)(c).

(2) 15The IP condition is met unless—

(a) the CFC’s assumed total profits for the accounting period
include amounts arising from intellectual property held by
the CFC (“the exploited IP”),

(b) all or parts of the exploited IP were—

(i) 20transferred (directly or indirectly) to the CFC by
persons related to the CFC at times during the
relevant period, or

(ii) otherwise derived (directly or indirectly) at times
during that period out of or from intellectual property
25held at times during that period by persons related to
the CFC,

(c) as a result of those transfers or other derivations, the value of
the intellectual property held by those persons related to the
CFC, taken together, has been significantly reduced from
30what it would otherwise have been, and

(d) if only parts of the exploited IP were so transferred or
derived, the significance condition is met.

(3) The significance condition is met if—

(a) the parts of the exploited IP (“the UK derived IP”) which
35were transferred or otherwise derived as mentioned in
subsection (2)(b) are, taken together, a significant part of the
exploited IP, or

(b) as a result of the transfers or other derivations of the UK
derived IP, the CFC’s assumed total profits for the
40accounting period are significantly higher than what they
would otherwise have been.

(4) In relation to a non-UK resident person who is related to the CFC, in
this section references to the transfer or holding of intellectual
property by a person related to the CFC are limited to, as the case
45may be—

(a) the transfer of intellectual property which before the transfer
was held by the non-UK resident person (wholly or partly)

for the purposes of a permanent establishment which the
person has in the United Kingdom, or

(b) the holding of intellectual property by the non-UK resident
person (wholly or partly) for those purposes.

(5) “The relevant period” means the period covering the accounting
5period and the 6 years before the accounting period.

Chapter 12

The low profits exemption

371LA Introduction to Chapter

This Chapter sets out an exemption called “the low profits
exemption” for the purposes of section 371BA(2)(b).

371LB 10 The basic rule

(1) The low profits exemption applies for a CFC’s accounting period if
subsection (2), (3), (4) or (5) applies.

(2) This subsection applies if the CFC’s accounting profits for the
accounting period are no more than £50,000.

(3) 15This subsection applies if the CFC’s assumed taxable total profits for
the accounting period are no more than £50,000.

(4) This subsection applies if—

(a) the CFC’s accounting profits for the accounting period are no
more than £500,000, and

(b) 20the amount of those profits representing non-trading income
is no more than £50,000.

(5) This subsection applies if—

(a) the CFC’s assumed taxable total profits for the accounting
period are no more than £500,000, and

(b) 25the amount of those profits representing non-trading income
is no more than £50,000.

(6) If the accounting period is less than 12 months, the amounts specified
in subsections (2), (3), (4)(a) and (b) and (5)(a) and (b) are to be
reduced proportionately.

371LC 30 Anti-avoidance

(1) The low profits exemption does not apply for a CFC’s accounting
period (“the relevant accounting period”) if condition A or B is met.

(2) Condition A is that—

(a) an arrangement is entered into at any time,

(b) 35in consequence of the arrangement, the low profits
exemption would (apart from this section) apply for the
relevant accounting period, and

(c) the main purpose, or one of the main purposes, of the
arrangement is to secure that the low profits exemption
40applies—

(i) for the relevant accounting period, or

(ii) for that period and one or more other accounting
periods of the CFC.

(3) Condition B is that, at any time during the relevant accounting
period, the CFC’s business is, wholly or mainly, the provision of UK
5intermediary services.

(4) For the purposes of subsection (3) the CFC provides “UK
intermediary services” if—

(a) a UK resident individual (“the service provider”) personally
performs, or is under an obligation personally to perform,
10services in the United Kingdom for a person (“the client”),
and

(b) the services are provided not under a contract directly
between the service provider and the client but under an
arrangement involving the CFC.

(5) 15The low profits exemption does not apply for a CFC’s accounting
period by virtue of section 371LB(2) or (4) if condition C is met.

(6) Condition C is that, in determining the CFC’s assumed taxable total
profits for the accounting period, Part 21B of CTA 2010 (group
mismatch schemes) has effect so as to exclude an amount from being
20brought into account as a debit or credit for the purposes of Part 5 of
CTA 2009 (loan relationships) or Part 7 of that Act (derivative
contracts).

Chapter 13

The low profit margin exemption

371MA Introduction to Chapter

25This Chapter sets out an exemption called “the low profit margin
exemption” for the purposes of section 371BA(2)(b).

371MB The basic rule

(1) The low profit margin exemption applies for a CFC’s accounting
period if the CFC’s accounting profits for the period are no more
30than 10% of the CFC’s relevant operating expenditure.

(2) In this section references to the CFC’s accounting profits are to those
profits as determined before any deduction for interest.

(3) The CFC’s “relevant operating expenditure” is its operating
expenditure brought into account in determining its accounting
35profits for the accounting period, excluding—

(a) the cost of goods purchased by the CFC, other than goods
used by the CFC in the territory in which it is resident for the
accounting period, and

(b) any expenditure which gives rise, directly or indirectly, to
40income of a person related to the CFC.

371MC Anti-avoidance

The low profit margin exemption does not apply for a CFC’s
accounting period (“the relevant accounting period”) if—

(a) an arrangement is entered into at any time,

(b) in consequence of the arrangement, the low profit margin
exemption would (apart from this section) apply for the
relevant accounting period, and

(c) 5the main purpose, or one of the main purposes, of the
arrangement is to secure that the low profit margin
exemption applies—

(i) for the relevant accounting period, or

(ii) for that period and one or more other accounting
10periods of the CFC.

Chapter 14

The tax exemption

371NA Introduction to Chapter

This Chapter sets out an exemption called “the tax exemption” for
the purposes of section 371BA(2)(b).

371NB 15 The basic rule

(1) Take the following steps to determine if the tax exemption applies for
a CFC’s accounting period.

Step 1

Applying section 371TB, determine the territory (“the CFC’s
20territory”) in which the CFC is resident for the accounting period.

Step 2

Determine the amount of tax (“the local tax amount”) which is paid
in the CFC’s territory in respect of the CFC’s local chargeable profits
arising in the accounting period (applying section 371NC so far as
25relevant).

Step 3

In accordance with section 371NE, determine the amount of the
corresponding UK tax for the accounting period.

(2) Subsection (3) applies if an amount of tax is paid in the CFC’s
30territory by a person (whether or not the CFC) in respect of any of the
CFC’s local chargeable profits arising in the accounting period taken
together with other amounts.

(3) For the purposes of step 2 in subsection (1) the amount of tax is to be
apportioned between the CFC’s local chargeable profits in question
35and the other amounts on a just and reasonable basis.

(4) In this Chapter references to the CFC’s local chargeable profits are to
its profits as determined for tax purposes under the law of the CFC’s
territory, ignoring any capital gains or losses.

371NC Reductions to “the local tax amount”

(1) 5This section applies for the purposes of step 2 in section 371NB(1).

(2) The local tax amount is to be reduced to what it would have been—

(a) had any income, or any income and expenditure (where the
income exceeds the expenditure), to which subsection (3)
applies not been brought into account in determining the
10CFC’s local chargeable profits arising in the accounting
period in respect of which tax is paid in the CFC’s territory,
and

(b) had any expenditure to which subsection (4) applies been
brought into account in determining those profits.

(3) 15This subsection applies to any income, or any income and
expenditure, of the CFC—

(a) which is brought into account in determining the CFC’s local
chargeable profits arising in the accounting period in respect
of which tax is paid in the CFC’s territory, but

(b) 20which does not fall to be brought into account in determining
the CFC’s assumed taxable total profits for the accounting
period.

(4) This subsection applies to any expenditure of the CFC—

(a) which is not brought into account in determining the CFC’s
25local chargeable profits arising in the accounting period in
respect of which tax is paid in the CFC’s territory, but

(b) which does fall to be brought into account in determining the
CFC’s assumed taxable total profits for the accounting
period.

(5) 30Subsection (6) applies if—

(a) in the CFC’s territory any tax falls to be paid in respect of the
CFC’s local chargeable profits arising in the accounting
period,

(b) under the law of that territory, any repayment of tax, or any
35payment in respect of a credit for tax, is made to any person,
and

(c) that repayment or payment is directly or indirectly in respect
of the whole or part of the tax mentioned in paragraph (a).

(6) The local tax amount is to be reduced (or further reduced after any
40reduction under subsection (2)) by the amount of that repayment or
payment.

371ND What are “designer rate tax provisions”?

(1) For the purposes of step 2 in section 371NB(1) “designer rate tax
provisions” means provisions—

(a) 45which appear to the HMRC Commissioners to be designed to
enable companies to exercise significant control over the
amount of tax which they pay, and

(b) which are specified in regulations made by the HMRC
Commissioners.

(2) Regulations under subsection (1) may make different provision for
different cases or with respect to different territories.

371NE 5 How to determine “the corresponding UK tax”

(1) For the purposes of step 3 in section 371NB(1) “the corresponding
UK tax” is the amount of corporation tax which, applying the
corporation tax assumptions, would be charged in respect of the
CFC’s assumed taxable total profits for the accounting period.

(2) 10In determining that amount of corporation tax—

(a) ignore any relief from corporation tax attributable to the local
tax amount which would be given to the CFC by virtue of
Part 2 (double taxation relief) in respect of any income, and

(b) deduct from what would otherwise be that amount of
15corporation tax—

(i) any amount which, applying the corporation tax
assumptions, would be set off against corporation tax
on the CFC’s assumed taxable total profits by virtue
of section 967 of CTA 2010 (cases in which a company
20receives a payment bearing income tax), and

(ii) any amount of income tax or corporation tax actually
charged in respect of any income included in the
CFC’s assumed taxable total profits.

(3) In subsection (2)(b) the references to an amount being set off or an
25amount actually charged do not include so much of any such amount
as has been or falls to be repaid to the CFC whether on the making of
a claim or otherwise.

Chapter 15

Relevant interests in a CFC

Introduction

371OA 30 Application of Chapter

This Chapter applies for the purpose of determining the persons who
have “relevant interests” in a CFC for the purposes of step 1 in
section 371BC(1).

371OB Provision about interpretation

(1) 35This section applies for the purposes of this Chapter.

(2) A person’s interest in a company is an “indirect” interest so far as the
person has the interest by virtue of having an interest in another
company; and references to a “direct” interest in a company are to be
read accordingly.

(3) 40An interest held by an open-ended investment company within the
meaning of Chapter 2 of Part 13 of CTA 2010 (see sections 613 and
615) is treated as held by the company’s shareholders in proportion
to their shareholdings.

(4) An interest held by the trustees of an authorised unit trust is treated
as held by the persons who have rights under the trust in proportion
to their rights.

(5) An interest held by a bare trustee or nominee (including by virtue of
5subsection (3) or (4)) is treated as held by the person or persons for
whom the bare trustee or nominee holds the interest.

(6) “Bare trustee” means a person acting as trustee for—

(a) a person absolutely entitled as against the trustee,

(b) two or more persons who are so entitled,

(c) 10a person who would be so entitled but for being a minor or
otherwise lacking legal capacity, or

(d) two or more persons who would be so entitled but for all or
any of them being a minor or otherwise lacking legal
capacity.

(7) 15Subsection (8) applies in a case not covered by subsection (5) if—

(a) an interest is held in a fiduciary or representative capacity
(including by virtue of subsection (3) or (4)), and

(b) there are one or more identifiable beneficiaries.

(8) The interest is taken to be held by that beneficiary or, as the case may
20be, apportioned between those beneficiaries on a just and reasonable
basis.

371OC “Relevant interests” of UK resident companies

(1) A UK resident company’s interest in a CFC is a “relevant interest”,
except so far as subsection (2) applies to it.

(2) 25This subsection applies to the interest so far as it is an indirect interest
which the UK resident company has by virtue of having an interest
in another UK resident company.

371OD “Relevant interests” of persons related to UK resident companies

(1) This section applies if, by virtue of section 371OC, a UK resident
30company (“UKRC”) has a relevant interest in a CFC.

(2) A related person’s interest in the CFC is a “relevant interest”, except
so far as subsection (4) or (5) applies to it.

(3) “Related person” means a person, other than a UK resident
company, who is connected or associated with UKRC.

(4) 35This subsection applies to the related person’s interest so far as it is
an indirect interest which the related person has by virtue of having
an interest in a UK resident company or another related person.

(5) This subsection applies to the interest so far as it is the same as
UKRC’s relevant interest in the CFC by virtue of UKRC having an
40interest in the related person.

371OE Other “relevant interests”

(1) This section applies if a person (“P”) has a direct interest in a CFC
which is not a relevant interest by virtue of section 371OC or 371OD.

(2) P’s direct interest is a “relevant interest”, except so far as subsection
5(3) applies to it.

(3) This subsection applies to P’s direct interest so far as it is the same as
another person’s relevant interest in the CFC by virtue of the other
person having an interest in P.

(4) In subsection (3) the reference to another person’s relevant interest is
10to another person’s relevant interest by virtue of section 371OC or
371OD.

Chapter 16

Creditable tax of a CFC

371PA What is “creditable tax”?

(1) For the purposes of step 2 in section 371BC(1) a CFC’s creditable tax
15for an accounting period is the total of—

(a) the amount of any relief from corporation tax attributable to
any foreign tax which, applying the corporation tax
assumptions, would be given to the CFC by virtue of Part 2
(double taxation relief) in respect of any income included or
20represented in the CFC’s chargeable profits for the
accounting period,

(b) any amount of relevant income tax which, applying the
corporation tax assumptions, would be set off against
corporation tax on the CFC’s chargeable profits for the
25accounting period by virtue of section 967 of CTA 2010 (cases
in which a company receives a payment bearing income tax),

(c) any amount of income tax or corporation tax actually charged
in respect of any income included or represented in the CFC’s
chargeable profits for the accounting period, and

(d) 30any amount of a foreign CFC charge paid in respect of any
income included or represented in the CFC’s chargeable
profits for the accounting period.

(2) In subsection (1)(a) “foreign tax” means—

(a) the local tax amount, or

(b) 35any tax under the law of a relevant foreign territory.

(3) In subsection (1)(b) “relevant income tax” means income tax which
the CFC bears by deduction on a payment so far as the payment is
included or represented in the CFC’s chargeable profits.

(4) In subsection (1)(d) “foreign CFC charge” means a charge under the
40law of a relevant foreign territory (by whatever name known) which
is similar to the CFC charge.

(5) In subsection (1)(b) to (d) references to an amount being set off, an
amount actually charged or an amount paid do not include so much