INTM239400 - Controlled Foreign Companies: Assumed Taxable Total Profits, Assumed Total Profits and the Corporation Tax Assumptions: UK Residence

TIOPA10/Part 9A/S371SD provides that the CFC is assumed to be resident in the UK from the beginning of the CFC’s first accounting period in which it becomes subject to Part 9A (i.e. its first accounting period beginning on or after 1 January 2013) until the company ceases to be a CFC. It is also assumed that the CFC is, has been and will continue to be within the charge to UK corporation tax, and that its accounting periods are accounting periods for corporation tax purposes.

However this assumption of UK residence does not require it to be assumed that there is any change in the location in which the CFC carries on its activities. This means that, in computing a UK tax measure of profits, the CFC will be treated as undertaking its trading or business activities outside the UK if this is in fact the case. The main difference this makes is that trade losses arising in an accounting period cannot by virtue of CTA10/S37 be set against total profits arising in the same accounting period or previous accounting periods. This is because the restriction at section 37(5) for losses arising from a trade carried on wholly outside the UK means that such losses can only be carried forward against income from the same trade.

TIOPA10/S371SD(2) makes it clear that the assumption of UK residence requires, in particular, that the CFC does not get the benefit of CTA09/S1279 which provides an exemption for profits from certain issued securities free of tax to residents abroad (“FOTRA securities”).

The consequences of assumed residence in the UK also include the following:

  • The CFC is entitled to credit for (that is, can treat as “creditable tax”) foreign tax paid in respect of its income in accordance with the normal double taxation relief rules (TIOPA10/Part 2/Ch2).
  • A trading CFC’s assumed taxable total profits will be computed as though the trade commenced at the time when its assumed residence in the UK began and ceased when the assumed residence ceased (CTA09/S41(2)).
  • The foreign company is brought within the transfer pricing legislation at TIOPA10/Part 4.

The assumed UK residence of a CFC will not affect the computation of any actual UK tax liability (TIOPA10/Part 9A/S371AA(11)). So, for example, where the CFC carries on a trade in the UK through a permanent establishment, the profits of that trade chargeable to corporation tax are computed in the normal way in accordance with CTA09/S5(2)&(3) and CTA09/Part 2/Ch4.

Likewise, if the CFC sells UK patent rights for a capital sum, the operation of CTA09/S912, which in these circumstances requires a non UK resident person to pay tax on the sum received, is not affected by the provisions of TIOPA10/Part 9A.

On the same basis, the assumption of residence in the UK does not require the CFC to account for income tax on interest which it pays.

The assumption of UK residence applies only for the purposes of computing assumed taxable total profits, corresponding UK tax for the purpose of the tax exemption or a CFC’s creditable tax and it is only the CFC whose profits are being computed which is assumed to be UK resident.

By virtue of TIOPA10/S371SD(3), where the CFC is actually UK resident immediately before the beginning of its first accounting period and then migrates offshore, an additional assumption is to be made, namely that the CFC’s UK residence from the beginning of the CFC’s first accounting period is not continuous with its (actual) UK residence before the beginning of that accounting period. This ensures that reliefs that were available for carry forward when the company was actually UK resident are not available to the CFC in computing its assumed taxable total profits for its first accounting period under the CFC rules.

TIOPA10/S371SD(4) requires an assumption that a determination of the CFC’s assumed taxable total profits has been made for all previous accounting periods back to (and including) the CFC’s first accounting period for the purposes of Part 9A. For example, if a CFC has chargeable profits in 2018 which are to be apportioned to a UK chargeable company and it has not needed previously to compute assumed taxable total profits because it has met the conditions of the excluded territories exemption, it will need to go back and compute its assumed taxable total profits for each year from 2013 in order to calculate any available relief arising from the carry forward of losses or capital allowances. This assumption is made, in particular, for the purposes of applying any relief which is relevant to two or more accounting periods.

Where a CFC ceases to be controlled from the UK during an accounting period, perhaps due to an acquisition by a non UK group and then 5 years later becomes controlled from the UK again, TIOPA10/S371VB (accounting periods) ensures that the CFC’s accounting period ends when it ceases to be a CFC and another accounting period begins only when the company becomes a CFC again. This means there is no continuity of the assumption of UK residence for the purpose of carrying forward reliefs.