INTM205010 - Controlled Foreign Companies: exemptions - Exempt Activities Test ('EAT')
The Exempt Activities Exemption
ICTA88/S748(1)(b)
The purpose of the exempt activities test is to exclude from
Chapter IV those controlled foreign companies which, because of the
nature of the activities in their territories of residence, can
reasonably be assumed not to be used for reducing United Kingdom
tax.
The exclusion covers a wide range of trading activities and
certain types of holding company. Most of the overseas subsidiaries
of United Kingdom groups (especially those which carry on a trade)
are likely to satisfy the test. However, the conditions are strict
and companies carrying on particular types of trade will not be
able to secure exclusion under the test and will have to be
considered under one of the other exclusions. Failure of the exempt
activities test does not of itself imply that the controlled
foreign company is being used to reduce United Kingdom tax.
To satisfy the exempt activities test for an accounting
period a controlled foreign company must satisfy all of the
following conditions:
- It must have a territory of residence for the purposes of the
test (see
INTM205020).
- It must have a 'business establishment' in its territory of
residence throughout the accounting period (see
INTM205030).
- It must be 'effectively managed' in its territory of residence
throughout the accounting period (see
INTM205040).
- It must not have as its main business any of the activities
precluded by the terms of ICTA88/SCH25/PARA6(2) (see
INTM205050 to
INTM205090 ) unless it is a holding
company which satisfies the requirements set out at
INTM205120 to
INTM205250.
If a controlled foreign company satisfies the exempt activities
test it is excluded from the scope of the Chapter IV charge
altogether. The legislation does not permit the apportionment of
part only of a company’s profits, for instance the part
represented by the investment income of a trading company.
In addition to the rules which apply to trading, investment
and holding companies generally, ICTA88/SCH25/Part II contains
provisions which relate specifically to banks and similar
businesses (
INTM205100) and insurance companies (
INTM205110).
There are a number of references in ICTA88/SCH25/Part II to
control and to connected or associated persons. Until the relevant
part of it was repealed by FA00, ICTA88/S756(3) applied the
definition of 'control' in ICTA88/S416 and ICTA88/S417 applied to
interpret ICTA88/S416. From 21 March 2000, ICTA88/S755D contains a
definition of control specific to Chapter IV (see
INTM202010 to
INTM202020). ICTA88/S756 (2) and (what
remains of) ICTA88/S756(3) continue to apply the definitions of
'connected persons' and 'associated persons' in ICTA88/S417,
ICTA88/S839 and ICTA/S783(10) for the purposes of Chapter IV (which
includes the Schedules).
It is recognised that there may be occasions where
information about the Controlled Foreign Company may not be
available or the time it would take to verify beyond any doubt that
the Controlled Foreign Company satisfies all of the conditions for
the exemption would be disproportionate. In these circumstances see
INTM214020 for further guidance.
