of any such amount as has been or falls to be repaid to the CFC or any
other person whether on the making of a claim or otherwise.

(6) “Relevant foreign territory” means a territory outside the United
Kingdom other than the territory in which the CFC is resident for the
accounting period.

Chapter 17

5Apportionment of a CFC’s chargeable profits and creditable tax

Introduction

371QA Application of Chapter

This Chapter applies for the purpose of apportioning a CFC’s
chargeable profits and creditable tax for an accounting period among
10the relevant persons as required by step 3 in section 371BC(1).

371QB Provision about interpretation

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

(2) Section 371OB applies as it applies for the purposes of Chapter 15.

(3) “Ordinary shares”, in relation to any company, means shares of a
15single class, however described, which is the only class of share
issued by the company.

(4) For the purposes of subsection (3)—

(a) “share” includes a fraction of a share, and

(b) shares issued by a company which are paid up to different
20amounts are not to be taken to be of a single class.

(5) A person (“P”) holds ordinary shares in the CFC “indirectly” if P
directly holds ordinary shares in a company which is share-linked to
the CFC.

(6) A company is “share-linked” to the CFC if it has an interest in the
25CFC only by virtue of it holding directly—

(a) ordinary shares in the CFC, or

(b) ordinary shares in another company which is share-linked to
the CFC (whether by virtue of paragraph (a) or this
paragraph),

30and “share-linked company” means a company which is share-
linked to the CFC.

How are the apportionments to be made?

371QC The basic rules

(1) If conditions X to Z are met, the CFC’s chargeable profits and
creditable tax are to be apportioned among the relevant persons in
35accordance with section 371QD.

(2) If not, the percentage of the chargeable profits and the percentage of
the creditable tax to be apportioned to each relevant person is to be
determined on a just and reasonable basis.

(3) Condition X is that the relevant persons all have their relevant
interests by virtue only of their holding, directly or indirectly,
ordinary shares in the CFC.

(4) Condition Y is that each relevant person meets the requirement that
5the person is either—

(a) UK resident at all times during the accounting period, or

(b) non-UK resident at all times during the accounting period.

(5) Condition Z is that no company which has an intermediate interest
in the CFC at any time in the accounting period has that interest
10otherwise than by virtue of holding, directly or indirectly, ordinary
shares in the CFC.

(6) A company (“C”) has an “intermediate interest” in the CFC if—

(a) C has an interest in the CFC, and

(b) one or more of the relevant persons have relevant interests in
15the CFC by virtue of having an interest in C.

371QD Apportionments to be made in proportion to shareholding

(1) If conditions X to Z in section 371QC are met, apply subsections (2)
and (3) to each relevant person.

(2) Determine the percentage (“P%”) of the issued ordinary shares in the
20CFC represented by the relevant person’s relevant interest.

(3) P% of the CFC’s chargeable profits and P% of the CFC’s creditable
tax is then apportioned to the relevant person.

(4) This section is supplemented by sections 371QE and 371QF.

371QE Indirect shareholdings

(1) 25This section applies to the relevant interest of a relevant person (“R”)
so far as R has that interest by virtue of holding, indirectly, ordinary
shares in the CFC (“the relevant shares”).

(2) The percentage of the issued ordinary shares in the CFC represented
by R’s relevant interest (so far as this section applies to it) is given by
30the following formula—

where—

• P is the product of the appropriate fractions of R and each of the
  share-linked companies through which R indirectly holds the
  35relevant shares, other than the share-linked company which
  directly holds the relevant shares, and

• S is the percentage of the issued ordinary shares in the CFC
  which the relevant shares represent.

(3) “The appropriate fraction”, in relation to any person who directly
40holds ordinary shares in a share-linked company, means that
fraction of the issued ordinary shares in the share-linked company
which the holding represents.

(4) If R has different indirect holdings of shares in the CFC (as in the case
where different shares are held through different share-linked
45companies)—

(a) apply subsection (2) separately in relation to each holding
(reading references to the relevant shares accordingly), and

(b) then add the separate results together to give the total
percentage of the issued ordinary shares in the CFC
5represented by R’s relevant interest (so far as this section
applies to it).

371QF Variable shareholdings

(1) This section applies if the percentage of the issued ordinary shares in
the CFC represented by a relevant person’s relevant interest varies
10during the accounting period.

(2) That percentage is taken to be the percentage equal to the sum of the
relevant percentages for each holding period.

(3) “Holding period” means a part of the accounting period during
which the percentage of the issued ordinary shares in the CFC
15represented by the relevant person’s relevant interest remains the
same.

(4) “Relevant percentage”, in relation to a holding period, means the
percentage given by the following formula—

20where—

• P is the percentage of the issued ordinary shares in the CFC
  represented by the relevant person’s relevant interest during
  the holding period,

• H is the number of days in the holding period, and

• 25A is the number of days in the accounting period.

371QG Anti-avoidance

(1) This section applies in relation to an accounting period (“the relevant
accounting period”) of a CFC if—

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

(b) 30the main purpose, or one of the main purposes, of the
arrangement is to obtain for any person a tax advantage
within section 1139(2)(da) of CTA 2010 in relation to—

(i) the relevant accounting period, or

(ii) that period and one or more other accounting periods
35of the CFC.

(2) The CFC’s chargeable profits and creditable tax for the relevant
accounting period are to be apportioned in accordance with section
371QC(2) (and not section 371QD if that section would otherwise
apply).

(3) 40The apportionments must (in particular) be made in a way which, so
far as practicable, counteracts the effects of the arrangement
mentioned in subsection (1)(a) so far as those effects are referable to
the purpose mentioned in subsection (1)(b).

Chapter 18

Control etc

371RA Overview of Chapter

(1) Sections 371RB and 371RE set out how to determine for the purposes
of this Part if a company is “controlled” by another person or
5persons.

(2) Section 371RC sets out certain cases in which a non-UK resident
company which would not otherwise be a CFC is to be taken to be a
CFC for the purposes of this Part.

371RB Legal and economic control

(1) 10A person (“P”) “controls” a company (“C”) if—

(a) by means of the holding of shares or the possession of voting
power in or in relation to C or any other company, or

(b) by virtue of any powers conferred by the articles of
association or other document regulating C or any other
15company,

P has the power to secure that the affairs of C are conducted in
accordance with P’s wishes.

(2) A person (“P”) “controls” a company (“C”) if it is reasonable to
suppose that P would—

(a) 20if the whole of C’s share capital were disposed of, receive
(directly or indirectly and whether at the time of the disposal
or later) over 50% of the proceeds of the disposal,

(b) if the whole of C’s income were distributed, receive (directly
or indirectly and whether at the time of the distribution or
25later) over 50% of the distributed amount, or

(c) in the event of the winding-up of C or in any other
circumstances, receive (directly or indirectly and whether at
the time of the winding-up or other circumstances or later)
over 50% of C’s assets which would then be available for
30distribution.

(3) For the purposes of subsection (2) any rights which P has as a
relevant bank are to be ignored.

(4) In subsection (2)—

(a) in paragraph (a) the reference to C’s share capital is to C’s
35share capital excluding any share capital held by relevant
banks,

(b) in determining for the purposes of paragraph (b) the
percentage of the distributed amount which it is reasonable
to suppose P would receive, ignore any rights of a relevant
40bank which would entitle the bank directly to receive a
percentage of the distributed amount at the time of the
distribution, and

(c) in determining for the purposes of paragraph (c) the
percentage of C’s assets which it is reasonable to suppose P
45would receive, ignore any rights of a relevant bank which

would entitle the bank directly to receive a percentage of C’s
assets at the time of the winding-up or other circumstances.

(5) “Relevant bank” means a person (“RB”) who—

(a) carries on banking business which is regulated in the
territory in which RB is resident, and

(b) 5is acting, in the ordinary course of that business, in relation to
money lent to C by RB in the ordinary course of that business.

(6) In subsections (2) and (4) references to P receiving any proceeds,
amount or assets include references to the proceeds, amount or
assets being applied (directly or indirectly) for P’s benefit.

(7) 10If two or more persons, taken together, meet the requirement of
subsection (1) or (2) for controlling a company, those persons are
taken to control the company.

371RC Legal and economic control: the 40% rule

(1) This section applies to a non-UK resident company (“C”) if—

(a) 15in accordance with section 371RB(7), two persons (“the
controllers”) control C, and

(b) one of the controllers is UK resident and the other is non-UK
resident.

(2) If conditions X and Y are met, C is to be taken to be a CFC (if C would
20not otherwise be).

(3) Condition X is that the UK resident controller has interests, rights
and powers representing at least 40% of the holdings, rights and
powers in respect of which the controllers fall to be taken as
controlling C.

(4) 25Condition Y is that the non-UK resident controller has interests,
rights and powers representing—

(a) at least 40%, but

(b) no more than 55%,

of the holdings, rights and powers in respect of which the controllers
30fall to be taken as controlling C.

371RD Legal and economic control: supplementary provision

(1) Subsection (2) applies for the purpose of—

(a) determining, in accordance with section 371RB, if a person, or
two or more persons, control a company, or

(b) 35determining if condition X or Y in section 371RC is met in
relation to two persons who control a company.

(2) There is to be attributed to each person all the rights and powers
mentioned in subsection (3) (so far as they would not otherwise be
attributed to the person).

(3) 40The rights and powers referred to in subsection (2) are—

(a) rights and powers which the person (“P”) is entitled to
acquire at a future date or which P will, at a future date,
become entitled to acquire,

(b) rights and powers of other persons so far as they fall within
subsection (4),

(c) if P is UK resident, rights and powers of any UK resident
person who is connected with P, and

(d) 5if P is UK resident, rights and powers which would, in
accordance with subsection (2), be attributed to a UK resident
person (“Q”) who is connected with P if Q were P (including
rights and powers which would be attributed to Q by virtue
of this paragraph).

(4) 10Rights and powers fall within this subsection so far as they—

(a) are required, or may be required, to be exercised in one or
more of the following ways—

(i) on behalf of P,

(ii) under the direction of P, or

(iii) 15for the benefit of P, and

(b) are not confined, in a case where a loan has been made by one
person to another, to rights and powers conferred in relation
to property of the borrower by the terms of any security
relating to the loan.

(5) 20In subsections (3)(b) to (d) and (4) references to a person’s rights and
powers include references to any rights or powers which the
person—

(a) is entitled to acquire at a future date, or

(b) will, at a future date, become entitled to acquire.

(6) 25In determining for the purposes of this section whether one person is
connected with another, section 1122(4) of CTA 2010 (as applied by
section 371VF(2)(b)) is to be ignored.

(7) In this section and sections 371RB and 371RC references to—

(a) rights and powers of a person, or

(b) 30rights and powers which a person is or will become entitled
to acquire,

include references to rights and powers which are exercisable by that
person, or (when acquired by that person) will be exercisable, only
jointly with one or more other persons.

371RE 35 Control determined by reference to accounting standards

(1) A person (“P”) “controls” a company (“C”) at any time when P is C’s
parent undertaking.

(2) But C is not to be taken to be a CFC by virtue of subsection (1) at the
time in question unless the 50% condition is met at that time.

(3) 40To determine if the 50% condition is met at the time in question,
assume—

(a) that C is a CFC at that time,

(b) that that time is itself an accounting period of the CFC, and

(c) that section 371BC (charging the CFC charge) applies in
45relation to the assumed accounting period.

(4) The 50% condition is met at the time in question if, as a result of steps
1 and 3 in section 371BC(1), at least 50% of the CFC’s chargeable

profits would be apportioned to P taken together with its UK
resident subsidiary undertakings (if any).

(5) “Parent undertaking” and “subsidiary undertaking” are to be read in
accordance with Financial Reporting Standard 2 issued in July 1992
by the Accounting Standards Board, as from time to time modified,
5amended or revised.

(6) For the purposes of this section it does not matter if P does not
prepare, or is not required to prepare, consolidated financial
statements in accordance with Financial Reporting Standard 2 (but
see section 371RF(3)).

371RF 10 Power to amend section 371RE etc

(1) The Treasury may by regulations amend section 371RE as they
consider appropriate to take account of—

(a) any modification, amendment or revision of Financial
Reporting Standard 2, or

(b) 15any relevant document.

(2) “Relevant document” means—

(a) a document which replaces Financial Reporting Standard 2,
or

(b) a document which replaces, modifies, amends or revises a
20document falling within paragraph (a) or a document which
is a relevant document by virtue of this paragraph.

(3) The Treasury may by regulations make provision corresponding to
section 371RE—

(a) which operates by reference to any other accounting
25standard dealing with consolidated financial statements, and

(b) which is to apply, instead of section 371RE, to determine if a
person “controls” a company where that person prepares, or
is required to prepare, consolidated financial statements in
accordance with that standard.

(4) 30The Treasury may by regulations provide that, if specified
conditions are met, a company is not to be taken to be a CFC by
virtue of—

(a) section 371RE, or

(b) provision corresponding to section 371RE contained in
35regulations under subsection (3).

(5) In subsections (3) and (4) references to section 371RE are to that
section as amended from time to time by regulations under
subsection (1).

Chapter 19

Assumed taxable total profits, assumed total profits and the corporation tax
assumptions

Overview

371SA Overview of Chapter

5This Chapter explains the concepts of “assumed taxable total profits”
and “assumed total profits” (see section 371SB) and “the corporation
tax assumptions” (see section 371SC) which are referred to in this
Part.

“Assumed taxable total profits” and “assumed total profits”

371SB What are “assumed taxable total profits” and “assumed total profits”?

(1) 10For the purposes of this Part a CFC’s “assumed taxable total profits”
for an accounting period are what, applying the corporation tax
assumptions, would be the CFC’s taxable total profits of the
accounting period for corporation tax purposes.

(2) “Taxable total profits” has the meaning given by section 4(2) of CTA
152010 (calculation of taxable total profits).

(3) But, for this purpose, in section 4(3) of CTA 2010—

(a) step 1 is to be applied subject to subsections (4) to (6) below,
and

(b) step 2 is to be ignored.

(4) 20Any income which accrues during the accounting period to the
trustees of a settlement in relation to which the CFC is a settlor or a
beneficiary is to be added to the income determined at step 1.

(5) If there is more than one settlor or beneficiary in relation to the
settlement, the income is to be apportioned between the CFC and the
25other settlors or beneficiaries on a just and reasonable basis.

(6) If by virtue of subsection (4) any income (“the settlement income”) is
added to the income determined at step 1, any dividend or other
distribution which derives from the settlement income is to be
excluded from the income determined at step 1.

(7) 30Subsection (8) applies if there is any income which, by virtue of
subsection (4), would (apart from subsection (8)) be included in—

(a) the chargeable profits for an accounting period of a CFC
which is a beneficiary in relation to a settlement, and

(b) the chargeable profits for an accounting period of a CFC
35which is a settlor in relation to the settlement.

(8) If the CFC charge is charged in relation to the beneficiary’s
accounting period, the income is not to be included in the settlor’s
chargeable profits.

(9) For the purposes of this Part a CFC’s “assumed total profits” for an
40accounting period are its assumed taxable total profits for the period
before taking step 2 in section 4(2) of CTA 2010.

“The corporation tax assumptions”

371SC What are “the corporation tax assumptions”?

(1) In this Part “the corporation tax assumptions” means the
assumptions set out in sections 371SD to 371SR.

(2) The corporation tax assumptions are to be applied in determining
5the following for an accounting period (“the relevant accounting
period”) of a CFC—

(a) the CFC’s assumed taxable total profits in accordance with
section 371SB(1),

(b) the corresponding UK tax in accordance with section 371NE,
10and

(c) the CFC’s creditable tax in accordance with Chapter 16.

371SD UK residence etc

(1) Assume—

(a) that the CFC is UK resident at all times during the relevant
15accounting period,

(b) if the relevant accounting period is not the CFC’s first
accounting period, that the CFC has been UK resident from
the beginning of the CFC’s first accounting period, and

(c) except where the CFC ceases to be a CFC at the end of the
20relevant accounting period, that the CFC will continue to be
UK resident until it ceases to be a CFC,

and that the CFC is, has been and will continue to be within the
charge to corporation tax, and that its accounting periods (as
determined in accordance with section 371VB) are accounting
25periods for corporation tax purposes, accordingly.

(2) Subsection (1)—

(a) does not require it to be assumed that there is any change in
the place or places at which the CFC carries on its activities,
and

(b) 30requires (in particular) that it be assumed that the CFC does
not get the benefit of section 1279 of CTA 2009 (exemption for
profits from securities free of tax to residents abroad).

(3) If the CFC is (actually) UK resident immediately before the
beginning of its first accounting period, assume that its UK residence
35from the beginning of that accounting period (as assumed in
accordance with subsection (1)) is not continuous with its (actual)
UK residence before the beginning of that accounting period.

(4) Except where the relevant accounting period is the CFC’s first
accounting period, assume that a determination of the CFC’s
40assumed taxable total profits has been made for all previous
accounting periods back to (and including) the CFC’s first
accounting period.

(5) Subsection (4) applies (in particular) for the purpose of applying any
relief which is relevant to two or more accounting periods.

(6) 45In this section references to the CFC’s first accounting period are to
the CFC’s accounting period which begins when it becomes a CFC.

371SE Close company

Assume that the CFC is not a close company.

371SF Claims and elections

(1) In relation to any relief under the Corporation Tax Acts which is
5dependent upon the making of a claim or election, assume the CFC—

(a) to have made that claim or election which would give the
maximum amount of relief, and

(b) to have made that claim or election within any applicable
time limit.

(2) 10Subsection (1) does not cover (so far as it would otherwise do so) a
claim or election under—

(a) section 18A of CTA 2009 (exemption for profits or losses of
foreign permanent establishments),

(b) section 1275 of CTA 2009 (relief for unremittable income),

(c) 15section 9A of CTA 2010 (designated currency of a UK
resident investment company), or

(d) regulations made under paragraph 16 of Schedule 8 to FA
2006 (election for lease to be treated as long funding lease).

(3) Subsection (1) is also subject to section 371SK(5).

371SG 20 Disapplication of assumption in section 371SF(1)

(1) This section applies if a notice is given to an officer of Revenue and
Customs requesting that the CFC be assumed—

(a) not to have made for the relevant accounting period a
specified claim or election otherwise covered by section
25371SF(1),

(b) to have made for the relevant accounting period a specified
claim or election, being different from one assumed by
section 371SF(1) but being one which (subject to compliance
with any applicable time limit) could have been made by a
30company within the charge to corporation tax, or

(c) to have disclaimed or required the postponement, in whole
or in part, of a specified allowance for the relevant accounting
period if (subject to compliance with any applicable time
limit) a company within the charge to corporation tax could
35have disclaimed the allowance or required such a
postponement (as the case may be).

(2) In determining for the purposes of section 371BA(3) the CFC’s
assumed total profits and the amounts to be relieved against those
profits at step 2 in section 4(2) of CTA 2010—

(a) 40the assumption set out in the notice under subsection (1) is to
be applied so far as relevant, and

(b) the assumption set out in section 371SF(1) is to be disapplied
to the extent necessary as a consequence.

(3) In determining the CFC’s creditable tax—

(a) 45the assumption set out in the notice under subsection (1) is to
be applied so far as relevant, and