INTM225550 - Controlled Foreign Companies: Entity Exemptions: Chapter 12 - The Low Profits Exemption: Introduction
The low profits exemption provides an entity-level exemption for CFCs that pose little risk of diverting UK profits because their profits are relatively low.
The low profits exemption is subject to a number of safeguards against possible avoidance activity (see INTM225600)
Chapter 12 provides an entity-level exemption for a CFC바카라 사이트™s accounting period if either the CFC바카라 사이트™s accounting profits or its assumed taxable total profits are no more than £500,000, and the amount of those profits that are non-trading income is no more than £50,000. The cap on non-trading income is included as there is a higher risk that this type of income can be artificially diverted from the UK.
A chargeable company has to list any CFCs relying on this exemption on its corporation tax return.
The Basic Rule
Accounting Profits
Assumed Taxable Total Profits
Non-Trading Income
Loss-Making Companies
The Basic Rule
TIOPA10/S371LB sets out the basic rules for applying the low profits exemption to the CFC바카라 사이트™s accounting period.
The low profits exemption applies if the CFC바카라 사이트™s accounting profits or its assumed taxable total profits are no more than £500,000 for the accounting period and the amount of those profits that are non-trading income is no more than £50,000.
Accounting Profits
Accounting profits are defined at INTM248200. Broadly, they are the amount of pre-tax profits of the CFC determined in accordance with generally accepted accounting practice.
Accounting profits are then adjusted to include or exclude certain items regardless of what the CFC바카라 사이트™s accounts show. One of these adjustments applies the transfer pricing rules at Part 4 of TIOPA10 to the measure of accounting profits if the difference made by the application of the rules is more than £50,000.
An example of this is shown in example 1 of INTM225650.
Some of the further adjustments to accounting profits exclude the following:
- amounts that would be exempt distributions (under Part 9A CTA09) in the hands of the CFC if it were a UK tax resident company,
- property business profits or losses and
- capital profits or losses.
Assumed Taxable Total Profits
The CFC바카라 사이트™s assumed taxable total profits are defined at INTM239200 and are computed in broadly the same way as the CFC바카라 사이트™s taxable profits would be computed for corporation tax purposes if the CFC were resident in UK.
Non-Trading Income
Non-trading income is defined as any income which is not trading income whilst trading income is defined as income brought into account in determining the CFC바카라 사이트™s trading profits for the accounting period in question. Trading profits are then defined as those that are chargeable under Part 3 of CTA09 (trading income). See INTM248100 for further details. Non-trading income in this context refers to a gross rather than a net amount of income. Distributions that are not exempt under Part 9A of CTA09 should be included within non-trading income.
Loss-Making Companies
The low profits exemption will also apply if the CFC바카라 사이트™s accounting profits or assumed taxable total profits for the accounting period are not more than £50,000 without regard of the cap for non-trading income. This allows easy access to the exemption for loss-making companies. However, any arrangements made which include a main purpose of sheltering significant amounts of non-trading income by losses in a CFC will fall within the definition of an avoidance arrangement that can be countered by Condition A of the anti-avoidance provisions.
For accounting periods of less than twelve months, the numerical thresholds for profits and non-trading income outlined above are proportionately reduced.
The low profits exemption is subject to a number of safeguards against possible avoidance activity.