20 May 2021

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The profits of overseas subsidiaries may be subject to UK corporation tax under the controlled foreign company (CFC) rules. A number of exemptions and reliefs are available which will need to be considered carefully, and claimed on the corporate tax return.

A CFC is a company which is resident outside the UK, but controlled by UK residents (along with any relevant overseas associated enterprises). The profits of a CFC are attributed to UK companies in accordance with their interest in the CFC (whether direct or indirect). These profits are then subject to an amount of tax equivalent to corporation tax, with a credit for a proportion of any overseas tax paid by the subsidiary.

An attribution is only required if the UK company has an interest of at least 25% in the subsidiary.

Special rules apply to offshore funds, insurance companies and companies which hold shares in a CFC as part of their trading stock.

The rules are complex and this factsheet outlines the main provisions only.


The CFC rules only apply if profits pass through a ‘gateway’.

An attribution of profits will only be required if there are arrangements to reduce or eliminate UK tax, and the profits of the subsidiary are increased as a result.

In addition, there is no attribution of profits required if:

  • No assets or risks are managed by connected parties in the UK;
  • Any assets or risks which are managed by connected parties in the UK could be replaced by unconnected parties; or
  • The subsidiary holds assets or risks for bona fide commercial purposes, and not for the purpose of avoiding tax.

There is no attribution required of non-trading finance profits if they fall below a de minimis level.


In addition to the gateway, there are a number of exemptions:

  • Low profits: This exemption applies where the accounting profits of the subsidiary are not more than £50,000, or not more than £500,000 provided non-trading income is not more than £50,000.
  • Low profit margin: This exemption applies where accounting profits are less than 10% of operating expenditure. This exemption will typically apply to low-risk overseas subsidiaries, such as those providing services to other group companies which are charged on a cost-plus basis.
  • Excluded territories: This exemption applies where the CFC is resident in one of the excluded territories, which are specified in regulations. In addition, specified income must not be more than the higher of 10% of profits or £50,000.
  • High tax: The exemption applies if the local tax paid is at least 75% of the UK corporation tax which would have been paid on the same profits.
  • Exempt period: A CFC is exempt for the 12 months after it first becomes a CFC, for example if it is acquired by a UK company from a third party.

Attributable profits

Where a CFC does not satisfy an exemption, its profits are attributed to UK companies in accordance with their interest in the CFC.

Attributable profits are broadly those which arise from a ‘significant people function’ (SPF) or a ‘key entrepreneurial risk-taking function’ which is located in the UK. The profits are calculated in accordance with the Organisation for Economic Co-operation and Development’s 2010 Report on the Attribution of Profits to Permanent Establishments.

There are exclusions for certain types of income:

  • All trading profits are excluded from an attribution, provided certain conditions are satisfied. For example, the CFC must have local premises and derive no more than 20% of its income or management cost from UK residents.
  • Non-trading finance profits (for example, interest income) are only attributable if they arise from funds provided from the UK or certain loans to UK connected companies.
  • Where the exclusion for non-trading finance profits does not apply, only 25% of any non-trading finance profits are attributed, provided certain conditions are satisfied.
  • Property income is excluded entirely from the CFC rules.

How we can help

We can assist you in identifying whether the CFC rules apply, and what steps can be taken to ensure that exemptions or exclusions are available.

For advice regarding any of the issues raised here, please speak to your usual Saffery partner, or contact Robert Langston.

This factsheet is based on law and HMRC guidance at 1 May 2021.

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