INTM203140 - Controlled Foreign Companies: exemptions - excluded countries
Application of non-local source income rules to branch or agency income: examples
It may help to have a copy of SI1998/3081 to hand when working
through these examples.
Example 1
| Total Controlled Foreign Company income | Branch income
(included) | |||
| Sales | 500,000 | |||
| Purchases | 300,000 | |||
| Net Sales | 200,000 | 20,000 | ||
| Plus | ||||
| Non-local interest | 50,000 | 2,000 | ||
| Non-local royalties | 25,000 | |||
| 275,000 | 22,000 | |||
| Less | ||||
| Costs | 75,000 | 2,500 | ||
| 200,000 | 19,500 |
- Regulation 6(3) does not apply. But non-local interest is greater than 10% of net branch profits.
- The non-local source income for the controlled foreign company is therefore:
| Interest | 48,000 | regulation 5(3)(b) | |
| Royalties | 25,000 | regulation 5(3)(c) | |
| Branch | 2,000 | regulation 5(3)(e) |
Example 2
A company resident in territory A has a branch in territory
B. Territory A operates an exemption method. The head office in A
makes a loan to the branch in B on which B pays interest. The
interest is liable to tax in territory A. The test is satisfied.
The facts are as above but territory A operates a credit
method of taxation. The interest paid by the branch to the head
office in territory A is not allowed as a deduction against the
taxable profits of the company except to the extent that it
represents interest paid by the company to another person. In
computing the company’s profits for tax in territory A the
interest paid by the branch is not therefore allowed. The test is
satisfied.
Example 3
| Total Controlled Forgein Company income | Branch income (included) | |||
| Sales | 500,000 | |||
| Purchases | 300,000 | |||
| Net Sales | 200,000 | 20,000 | ||
| Plus | ||||
| Non-local interest | 50,000 | 10,000 | ||
| Non-local royalties | 25,000 | |||
| 275,000 | 30,000 | |||
| Less | ||||
| Costs | 75,000 | 25,000 | ||
| 200,000 | 5,000 |
- Under regulation 6(3), 10,000 gross interest exceeds 5,000 net branch profits and therefore 10,000 is substituted for 5,000 when looking at the controlled foreign company's non-local source income.
- The non-local source income for the controlled foreign company is therefore:
| Interest | 40,000 | regulation 5(3)(b) | |
| Royalties | 25,000 | regulation 5(3)(c) | |
| Branch | 10,000 | regulation 5(3)(e) |
