INTM202050 – Controlled Foreign Companies: definitions
Definitions: residence
General
The terms 'resident' and 'residence' are used in connection with
Chapter IV in a number of different senses. The meaning of the
terms may vary and care is necessary to establish which of the
possible meanings is the one appropriate to the particular context.
Questions of residence arise for the purposes of -
- determining whether a company is 'resident outside' the United Kingdom (ICTA88/S747(1)(a)) - see Resident outside United Kingdom – ICTA88/S747(1)(a).
- determining whether a dual-resident company is controlled by persons resident in the United Kingdom (FA94/S249) - see Treaty non-resident (TNR) companies.
- establishing in which territory (if any) a controlled foreign company is resident for the purposes of the lower level of taxation test (ICTA88/S747(1)(c)) - see Territory of residence – ICTA88/S747(1)(c) and ICTA88/S749(1).
- establishing in which territory (if any) a controlled foreign company is resident for the purposes of the exempt activities test (ICTA88/SCH25/PARA5(2)(b) - see Companies with no territory of residence - Exempt Activities Test – ICTA88/SCH25/PARA5(2); and
- establishing whether a controlled foreign company is resident in a territory for the excluded countries regulations - see INTM203040.
Resident outside United Kingdom – ICTA88/S747(1)(a)
A company which is resident in the United Kingdom and is therefore liable to Corporation Tax on its world-wide profits cannot be a controlled foreign company. A company should be regarded as resident outside the United Kingdom if it is not resident here or is a treaty non- resident company subject to Treaty non-resident (TNR) companies below. Residence in the United Kingdom is determined either under the 'central management and control’ test or the incorporation rule in FA88/S66 and FA88/SCH7. A company with dual residence, for instance, one which is resident in this country because its central management and control is situated here and which on some other criterion (such as place of incorporation) is treated by another country as resident there, is not a controlled foreign company unless it is a treaty non-resident company.
Control by persons resident in the United Kingdom – ICTA88/S747(1)(b)
The residence status of the persons who control an overseas company may have to be considered in order to determine whether the company is controlled by persons resident in the United Kingdom. An overseas company should be regarded as controlled by United Kingdom residents if the persons (both individual and corporate) who control it (see INTM202020) are resident in the United Kingdom for tax purposes.
Territory of residence – ICTA88/S747(1)(c) and ICTA88/S749(1)
Rules for determining where an overseas company is resident are
necessary to establish whether it is subject to a lower level of
taxation (see
INTM202030) in its territory of
residence and also for the purposes of the exempt activities test
(see
INTM205000). The objective is to
identify a territory which treats the company as resident there
under its own laws. The central management and control test is not
usually relevant as most foreign jurisdictions have a concept of
residence which is not based on central management and control.
Instead, the Chapter IV test is based on the approach
commonly adopted in the residence articles of double taxation
treaties. The general rule in ICTA88/S749(1) is that a company
resident outside the United Kingdom is regarded as resident in the
territory in which it is liable to tax on its profits by reason of
domicile, residence or place of management throughout the relevant
accounting period.
A company would be regarded as liable to tax on its profits
in a territory even though it might actually pay no tax there. That
may be, for example, because of losses or double taxation relief or
because, for whatever reason, the tax authorities do not in
practice assess or collect the tax for which the company is legally
liable. The tax in question must be a tax similar in nature to
United Kingdom taxes on profits, namely, Income or Corporation Tax.
It would not include turnover or payroll taxes, or flat-rate
levies.
The term 'territory' includes jurisdictions which do not
have full independent status, for example the Isle of Man and
Channel Islands, but does not include the individual states of a
federal state such as those of the USA. In computing the local tax
both appropriate federal and state taxes should be taken into
account.
The term 'domicile' covers territories which charge
companies to tax on the basis of incorporation, registration under
their laws or some similar criterion.
The term 'residence' in the phrase 'domicile, residence or
place of management' can only be interpreted in accordance with its
meaning in United Kingdom tax law, that is, the central management
and control test. The term is therefore appropriate only to
territories with a test of residence similar to the United Kingdom
test.
The term 'place
of management' covers countries in which liability
to tax depends on some particular level of management being carried
out in those countries. This term includes many of the criteria for
corporate tax liability which are used overseas such as 'effective
management', 'seat of business', 'central administration', 'head
office', 'principal place of business' and any similar
criterion.
Residence in more than one territory – ICTA88/S749(2) and (4)
The rule in ICTA88/S749(1) that a company is resident in the territory in which it is liable to tax by reason of domicile, residence or place of management may in some cases result in a company being resident in more than one territory. For example, a company may be liable to tax in one territory because it was incorporated there and in another because it is managed there. ICTA88/S749(2) provides that the following rules will apply in determining which of the candidates is to be regarded as the territory of residence for the purposes of Chapter IV:
- If throughout the accounting period the company’s place
of effective management is situated in only one of the territories,
that is the territory of residence (ICTA88/S749(3)(a)).
- If throughout the accounting period the place of effective
management is situated in two or more of the countries, the one in
which the greater amount of the company’s assets is situated
at the end of the relevant accounting period is the territory of
residence (ICTA88/S749(3)(b)).
- If neither (a) nor (b) above applies (for example, because the
company’s place of effective management is outside the
countries in which it is liable to tax by reason of domicile,
residence or place of management) the territory of residence is the
country of residence in which the greater part of the
company’s assets is situated at the end of the accounting
period (ICTA88/S749(3)(c)).
- If none of the above produces a single territory of residence
(for example, because all the company’s assets and its
effective management are situated outside the territories in which
it is liable to tax) the company may make an election to be treated
as resident in a territory.
- Where an election has not been made within the statutory time
limit the Board may designate a territory to be the territory of
residence.
In determining in which of two or more territories the greater
amount of a company’s assets is situated, account is taken
only of the assets situated in those territories immediately before
the end of the relevant accounting period. The amount of the assets
is to be determined by reference to their market value
(ICTA88/S749(6)).
The term 'place
of effective management' is commonly used in
double taxation agreements as a tie breaker to establish a single
territory of residence. It looks to the place where a company is
actually managed. Usually this will be the place where the company
has its central management and control. An exception may be the
kind of case referred to in paragraph 22 of the Statement of
Practice SP1/90 dated 9 January 1990 on company residence, where a
company is run by executive directors in one country who are
subject to the final directing power of a controlling board who
meet in another country. The place of effective management is
likely to be the country in which the executive directors exercise
their functions, although, depending on the precise powers of the
non-executive directors, central management and control may lie in
the other country.
Elections and Designations – ICTA88/S749(3)(d) - (e) and (4) - (9) and ICTA88/S749A
An election under ICTA88/S749(3)(d) may be made by any one or
more persons who together have a majority assessable interest in
the company in that accounting period. The election, which is
irrevocable, then has effect for both the accounting period in
which it was made and each subsequent period up until the first
period in which the territories eligible for the claim differ. The
election, once made, is affected by neither a change in the persons
with an interest in the company nor a change in their relative
interest. The territories eligible for the election differ where
the controlled foreign company is no longer resident in at least
one of the two territories in which it was liable to tax by reason
of domicile, residence or place of management (see
Residence in more than one territory –
ICTA88/S749(2) and (4)) or the controlled foreign company
becomes resident in an additional territory by reason of domicile,
residence or place of management (ICTA88/S749(3)(a)). 'Eligible
territories' for the purpose of an election are territories where
the company is either effectively managed or has a majority of
assets situated at the end of the relevant accounting period or is
liable to tax by reason of domicile, residence or place of
management.
For the purposes of making an election, one or more persons
together have a majority assessable interest in a controlled
foreign company in an accounting period if an amount greater than
50% of the chargeable profits for that period would be apportioned
to them on an apportionment and charged to tax. Elections must
be:
- made by notice given to an officer of the Board
- made within 12 months of the end of the controlled foreign company’s relevant accounting period
- state the assessable interest (the amount that would be apportioned and charged to tax) of each person making the election
- signed by the persons making it.
The provision in TMA70/S42 and TMA70/SCH1A do not apply to
elections under this section.
Where none of the tests in ICTA88/S749(3) (a) - (c) to find
a single territory of residence applies and an election has not
been made within the time limit the Board may designate a territory
to be the territory of residence. A notice of designation is given
to every company resident in the United Kingdom which appears to
the Board to have an assessable interest in the controlled foreign
company at any time during the accounting period of the controlled
foreign company in relation to which the designation is made. The
notice specifies the date on which it is made, the controlled
foreign company to which it refers, the first accounting period for
which it is made and the territory designated. A designation by the
Board is irrevocable.
Companies with no territory of residence – ICTA88/S749(5)
The rule in ICTA88/S749(1) that a company is resident in the
territory in which it is liable to tax by reason of domicile,
residence or place of management will sometimes result in a company
having no territory of residence. Some territories (for example,
Bermuda) have no system of corporate taxation, some (for example,
Jersey) impose no tax on the profits of certain categories of
company, while others (for example, Brazil or Hong Kong) impose tax
on companies not by reference to domicile, residence or place of
management but by reference to the existence of sources of income
within the territory concerned. A company could be domiciled and
managed at all levels in such a territory without being resident
there within the meaning of ICTA88/S749(1). If it were not resident
elsewhere, it would not have a territory of residence for Chapter
IV purposes.
The main consequence of a company having no territory of
residence in this way is that it is conclusively presumed to be
subject to a lower level of taxation (see
INTM202030). There are, however,
special rules which may assign a territory of residence to such a
company solely for the purposes of the exempt activities test.
Companies with no territory of residence - Exempt Activities Test – ICTA88/SCH25/PARA5(2)
A single territory of residence for a controlled foreign company needs to be established for the exempt activities test. Where a controlled foreign company has no territory of residence in accordance with ICTA88/S749(5), it may be regarded solely for the purposes of the exempt activities test as resident in the territory in which its business affairs are effectively managed (see INTM205040) provided that -
- the territory of effective management is outside the United Kingdom; and
- the territory of effective management is not one in which companies are liable to tax by reason of domicile, residence or place of management (see Territory of residence – ICTA88/S747(1)(c) and ICTA88/S749(1)).
A controlled foreign company which has no territory of residence
but which is effectively managed in a territory which taxes
companies on the basis of domicile, residence or place of
management is likely to have deliberately arranged not to be
resident in that territory in which it would normally be resident.
One result of this could be, for example, that it pays no tax on
profits arising outside that territory. For this reason it is
specifically prevented from satisfying the exempt activities test.
However, the special status given by the People's Republic
of China to the Special Administrative Regions of Hong Kong and
Macao led to some doubt as to how these regions were to be
accommodated within the Exempt Activities Test, where appropriate.
Paragraph 5(3) puts the matter beyond doubt by allowing a company
resident in one of these regions to have that region as its
territory for the purposes of the Exempt Activities Test. Although
introduced by FA03/S201, the paragraph applies retrospectively to
the date each Special Administrative Region was formed.
Exceptionally, a controlled foreign company may be
effectively managed in more than one territory. In such cases the
United Kingdom company or companies having the majority interest in
the controlled foreign company (see
Elections and designations – ICTA88/S749(3)(d)
-(e) and (4) - (9) and ICTA88/S749A) may notify the Board which
of the possible territories is to be regarded as the territory of
residence for the application of the exempt activities test.
Companies with no territory of residence - Excluded Countries Regulations
For the purposes of the Excluded Countries Regulations (
INTM203000) a company which has no
territory of residence under ICAT88/S749(1) is treated as resident
in the country where it is incorporated.
For accounting periods beginning on or after 3 December 2004
this definition was amended to treat a company as resident in the
country where it is incorporated and liable to tax in that
territory on its profits.
Accounting periods – ICTA88/S751(2)(b)
The rules for determining a company’s territory of
residence are applied by reference to the facts of each separate
accounting period. Under ICTA88/S751(2)(b), an accounting period is
deemed to end whenever a company becomes, or ceases to be, liable
to tax in a territory by reason of domicile, residence or place of
management.
An accounting period will end whenever a company -
- ceases to be liable to tax in its territory of residence
- ceases to be liable to tax in another territory
- becomes liable to tax in a new territory of residence; or
- becomes liable to tax in a territory other than a new territory
of residence.
A company can have only one territory of residence in an accounting period but its territory of residence may be different in a subsequent accounting period.
Treaty non-resident ('TNR') companies
A company may be resident in the United Kingdom (whether by
virtue of incorporation here or central management and control) and
also resident in a second territory under its local law. A Double
Taxation Agreement between the United Kingdom and the other
territory may contain a 'tie-breaker' provision to determine which
country has taxing rights. Typically (but not invariably) the
'tie-breaker' provision would treat a country in which the company
is 'effectively managed' as the country of residence for the
purposes of the Agreement.
FA94/S249 provides that any company which is resident in the
United Kingdom for the purposes of the Taxes Act and which is also
regarded for the purposes of a Double Taxation Agreement as
resident outside the United Kingdom shall be treated as resident
outside the United Kingdom. From 1st April 2002, FA94/S249 no
longer applies for the purposes of any section of the controlled
foreign companies' legislation other than ICTA88/S747(1)(a) (which
identifies a non-UK resident company for CFC identification
purposes). A TNR parent company will therefore be treated as a UK
resident under the controlled foreign companies' charging
provisions and is subject to the assessment and return requirements
of Chapter IV.
However where a company concerned was already treated as
resident outside the United Kingdom before the 1 April 2002, as a
consequence of the operation of a double taxation treaty, and has
not subsequently ceased to be treated this way, that company will
continue to be treated as non resident. Notwithstanding this
provision
If one of the following conditions A or B is met by the
company treated as a non-UK resident at any time on or after the 22
March 2006 the controlled foreign companies legislation will
continue to apply to that company.
Condition A - that either on or after 22 March 2006 the non
resident company that prior to this date did not own a subsidiary
(directly or indirectly), becomes the direct or indirect owner of a
UK resident company as a subsidiary.
Condition B – that immediately before 22 March 2006
the non resident owns, directly or indirectly, a company as a
subsidiary (whether UK resident or not), and at any time on or
after that date the non resident company, directly or indirectly,
becomes the owner of any UK resident company as a subsidiary (or,
as the case may be, another UK resident company) and as a direct or
indirect consequence of the ownership there is a qualifying change
in activities.
S90(5) to (8) FA2002 sets out the application of the
conditions above and provides definitions of terms used that
include qualifying changes in activities, ownership and UK resident
company.
