INTM226300 - Controlled Foreign Companies: Entity Exemptions: Chapter 14 - The Tax Exemption: Example 1

This example illustrates the comparison that needs to be made between the local tax amount and the corresponding UK tax. It shows where a CFC does not meet the tax exemption.

A CFC resident in territory X has assumed taxable total profits of £100,000 in the accounting period to 31 March. The CFC pays £3,000 tax in respect of those profits in territory X and in addition pays £11,000 tax in territory Y where it trades through a permanent establishment. The £3,000 tax paid in territory X is net of tax relief given by country X for the tax paid in territory Y. The comparison to be made in accordance with the steps at section 371NB is as follows:

A = Corresponding UK tax, B = local tax amount. We are assuming that the UK CT rate is 20% and that the UK allows DTR with respect to the tax paid in territory Y.

-	£	-
£100,000 @ 20%	20,000	-
less tax paid in territory	11,000	-
-	9,000	(A)
Tax paid in territory X	3,000	(B)

The local tax in (B) is 33.33% of the corresponding UK tax in (A). This is less than 75% of the corresponding UK tax so the tax exemption does not apply.