INTM208320 - Controlled Foreign Companies: exemptions - the motive test

Application of motive test: examples - controlled foreign company’s profits effectively subject to tax in the United Kingdom

Example 9

An offshore open-ended investment company is controlled by a United Kingdom resident company. The facts show that:

• the main reason for the existence of the offshore company is to invest in cash and bonds; and
• the company fails the non-qualifying investment test in FA96/SCH10/PARA8 such that the United Kingdom parent’s holding in it is treated under FA96/SCH10/PARA4 as if it were a creditor relationship of the United Kingdom resident company and the sum each year chargeable under FA96/S80 on the United Kingdom parent fully reflects the increase in the chargeable profits;

Whilst the existence of the company achieves a reduction in tax by a diversion of profits from the United Kingdom, the United Kingdom tax charge on the parent demonstrates that its the achievement is not one of the main reasons for the company’s existence. The diversion of profits leg of the motive test is consequently passed.