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How Controlled Foreign Corporation Rules Look Around the World: United Kingdom

7 min readBy: Sebastian Dueñas, Daniel Bunn

The United Kingdom adopted its CFC rules regime in 1984, and they were subject to minor changes until 2012, when the CFC regime was entirely modified.

The United Kingdom applies CFC rules at the entity level only to foreign companies in low-taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. jurisdictions. The UK has a territorial system of taxation, which is why it has the need for a CFC regime that allows the government to address tax planning and the possible effects of base erosion.

The UK had the rules in place before the European Union (EU) adopted its own standard. This is why the country did not adopt some standards imposed by the EU in the Anti-Tax Avoidance Directive (ATAD). The country was expected to leave the EU in the first half of 2019, but since that has not happened yet, compliance with the ATAD was mandatory.

As is the case with many CFC regimes, the basic features of UK CFC rules consist of:

  • A shareholding requirement for the determination of control.
  • Applicability standards.
  • Type of income that is taxed.

Shareholding requirement for the control determination in the UK

Under the UK rules a CFC is any nonresident company in which a UK person or persons hold at least a 25 percent interest directly or indirectly.

Unlike what occurs with some CFC rules in other countries, under the UK legislation a foreign entity qualifies as a CFC depending on a broad set of standards. Those are:

  • Legal control: measured by the possession of shares or voting rights.
  • Economic control: the entitlement that a person has to a majority of the proceeds or to the disposal of the shares of a company.
  • Accounting control: which is when the parent company undertakes the role for financial purposes under FRS2 (the accounting standard under British rules).

Under the accounting determination of control, a company is a CFC if the accounts of that foreign company are consolidated in the accounts of a UK company.

Control can also be determined under a joint venture test. As an example, imagine that a UK and a U.S. company together operate a joint venture in Singapore. The UK controls a 40 percent of the venture, and the U.S. company controls the rest. In this case the joint venture will be considered a CFC for UK purposes, and the income derived from the operation can be taxed at the UK under certain conditions.

Applicability of the rules

The basic aim of the CFC regime is to identify whether all or a part of the profits of a nonresident UK company should be brought into charge to a UK resident. The charge is the UK tax applied to a UK shareholder of a CFC that falls into the taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. derived from the CFC, not including capital gains.

The CFC regime operates by applying a series of charge getaways to the different types of profits, when those are not exempt. The getaways are a series of tests that work as filters for profits in order to determine if they must be taxed. The application of each filter works in sequence. There are different filters (getaways) that will limit or eliminate the application of CFC rules.

A chargeable company is a UK resident company that has sufficient interest in a CFC and enough chargeable profits to be taxed. A chargeable company will suffer a CFC charge (the equivalent to Subpart F income under the U.S. regime) only if there are chargeable profits of the CFC and those profits are subject to the rules in any of the getaways (thresholds for CFC charges to apply). The list includes:

Table 1. Detail of charge getaways under British rules

Source: HMRC

Chapter Getaway Features


Determines if any CFC charge getaway applies.

The initial filter to apply the other charges. Ch 3. excludes CFCs with no chargeable profits from the CFC regime. If an exemption applies there is no need to apply getaways.


Deals with all profits except for trading finance profits and profits that arise from a property business.

For profits earned by a CFC with respect to assets or contractual risks where the functions of those assets or related risks are undertaken by the UK parent, a charge may apply.


Deals with non-trading finance profits.

Applies to profits earned from lending to other members that are part of a multinational group, and third parties. If those profits are derived from assets and risks, capital investment, dividend arrangements, and leases with respect to the UK company, a charge may apply.


Deals with trading finance profits.

Consists of a 3-step process to evaluate the capitalization of a CFC. The process is used to calculate the level of trading finance profits. It Includes banks and insurance companies.


Deals with captive insurance companies.

The rules capture underwriting and investment profits from the receipt and investment of insurance premiums, from contracts or relations with UK companies, to evaluate charges.


Deals with subsidiaries of regulated financial companies.

Identifies chargeable profits of a CFC when the CFC is subject to a solo consolidation waiver, or it has subscribed arrangements that have an equivalent effect. Applies only to banking businesses.

What is the type of income that is taxable: all income or just passive income?

The UK rules address active and passive income. If profits are not in any of the exempted categories and pass through one or more of the charge getaways (including the Chapter 3 getaway), it would be necessary to determine the amount of chargeable profits of a CFC.

The categories of chargeable profits include business profits attributable to UK activities, non-trading finance profits, trading finance profits, and captive insurance profits.

To arrive at the amount of a charge, it is necessary to apportion the CFC’s chargeable profits and creditable taxes among the persons with relevant interests in the CFC and charge a sum equal to the corporate tax on the apportioned chargeable profits of the CFC, for each chargeable company.

Not all the income of a CFC is taxed and there are some exemptions for CFC charges. Those are:

  • A relief for corporate restructuring with a non-tax period for those cases
  • An excluded territories exemption in cases where the income tax rate applied to a CFC exceeds 75 percent of the UK corporate rate
  • An exemption for low profits that applies when profits in a fiscal year do not exceed £000 or £500.000 if non-trading profits are £50.000
  • A low profit-margin exemption that exempts from charges CFCs when their profits are not more than 10 percent of the relevant operating expenditure.

Planned modifications for the CFC regime

The UK has agreed to modify its CFC rules according to the ATAD until the date for Brexit arrives. The OECD BEPS recommendations have not been considered by the UK government because the government considers that its CFC rules have incorporated standards that are higher than the ones in the project.

The first modification relates to the scope of CFC rules, which will be expanded for the purposes of determining if an entity is a CFC. The ATAD requires countries to incorporate a measure of control that takes into account interests held by nonresident associates or related parties, something that the UK rules do not currently take into account. The second change laid out refers to restricting the scope of the full and partial exemption rules for finance profits that have been generated by significant functions being carried out by a controlling company in an EU member state. To comply with the ATAD, the UK needs to amend its CFC rules to eliminate the exemption that benefits non-trade finance profits.


The UK system is not adjusted to the exact standards imposed by the EU on the ATAD. The UK rules are designed to arrive at the most accurate definition of foreign income that should be taxed in the home country. These rules apply one of the most detailed approaches to solving the issue of taxing the right type and amount of foreign income. The method can be considered more effective, but the compliance implications and derived costs may be higher compared to those that are derived from the application of other methods. The use of charges to exempt or include the income derived from the operation of a CFC is not the simplest tool to address base erosion issues but carefully segregates income derived from different activities to avoid affecting the UK multinationals operating abroad. British lawmakers attempted to simplify the system with the inclusion of charge 3 getaway as the initial filter to apply the rules.

Note: This is the fourth of nine posts which describe how CFC rules work in the United States, China, Spain, Germany, Colombia, France, Netherlands, Japan, and the United Kingdom. A longer discussion of the history of CFC rules and more details on these countries can be found here.

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