One popular area in Advanced Tax and BPT is controlled foreign companies (CFCs). CFCs have been examined in the last 4 consecutive Advanced Tax exams.

You need to learn 3 things about CFCs.

·       Definition Of A CFC

A CFC is an overseas resident company controlled by UK resident persons (51%OSC) -both companies and individuals that have artificially diverted profits away from the UK.

·       5 Exemptions

If any ONE of the 5 exemptions is satisfied then there is no CFC Tax charge

Exempt Period -If a UK company takes over a company in a tax haven, there is no CFC tax charge for the first 12 months

Excluded Territory -If the overseas country is on the list of excluded territories,   there is no CFC tax charge

Low Profits -if the CFC has trading profits of less than £500,000 and investment income of less than £50,000 in a 12-month period,, there is no CFC tax charge.

Low-Profit Margin -if the CFC has operating profits of less than 10% , there is no CFC tax charge.

Tax Rate -If the tax rate in the overseas country is at least 75% of the UK tax rate , there is no CFC tax charge

·       CFC Tax Charge

The CFC tax charge is imposed on any UK company that owns at least 30% of the CFC and is added to the UK corporation tax liability.

The CFC tax charge is based on the UK company’s share of profits diverted from the UK.

Double tax relief (DTR)  can be claimed for any overseas tax suffered on that proportion of profits taxed in the UK.

The overseas tax is given to you in the question and HMRC offer DTR under unilateral basis even if there is no double tax treaty between the UK and the overseas country. 

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