Introduction
The Controlled Foreign Company (CFC) rules – set out in Part 9A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) – are designed to stop UK businesses and individuals from diverting profits to companies in low- or no-tax countries to avoid UK tax.
If a foreign company is classed as a CFC, part (or all) of its profits can be brought back into the UK tax net and taxed as if earned by the UK parent or controlling company.
What Is a Controlled Foreign Company?
A company is treated as a CFC if:
- It is not resident in the UK, and
- It is controlled by UK residents (individuals or companies).
Control generally means UK persons (alone or together) can:
- Direct the company’s affairs or voting,
- Or are entitled to more than 50% of its income, assets, or proceeds if it were wound up.
Example:
A UK company owns 60% of a company in Malta.
Although the business operates overseas, it is managed from London and pays little tax in Malta.
This company is controlled from the UK and could be classed as a CFC.
Residence – When Is a Company Non-UK Resident?
A company is non-UK resident if it is liable to tax in another country because of where it is managed or incorporated — not just because it earns income there.
For example, simply having a branch or warehouse abroad (a “permanent establishment”) doesn’t make the company non-resident.
What Happens If a Company Is a CFC?
If no exemption applies, a portion of the CFC’s profits will:
- Be apportioned to UK companies or shareholders who control at least 25%, and
- Be taxed in the UK at the main Corporation Tax rate (currently 25%).
The extra tax appears as a CFC charge on the UK company’s CT600 return.
Example:
UK-based Bright Future Ltd owns 100% of Sunrise Global Ltd, registered in Mauritius.
Sunrise earns £100,000 in passive income (interest and royalties) and pays just £10,000 local tax.
If no exemption applies:
- UK tax at 25% = £25,000
- Credit for foreign tax = £10,000
- Extra UK tax due: £15,000
Exemptions – When the CFC Rules Don’t Apply
The CFC regime has five key exemptions that often prevent a UK tax charge:
| Exemption | Key Condition | Purpose |
| 1. Exempt Period | First 12 months of CFC existence | Transitional relief |
| 2. Excluded Territories | CFC is in a “low risk” country (e.g., Canada, Germany) | Simplification |
| 3. Low Profits | Profits ≤ £50,000 (or ≤ £500,000 if ≤ £50,000 non-trading) | De minimis |
| 4. Low Profit Margin | Profit ≤ 10% of operating costs | Routine operations |
| 5. Tax Exemption | Local tax ≥ 75% of equivalent UK tax | High-tax territories |
Example – Tax Exemption Test:
A CFC in Poland earns £300,000 and pays £60,000 tax there.
If UK tax on that profit would be £75,000, then 75% of that = £56,250.
Since £60,000 > £56,250, it passes the test — no UK CFC charge applies.
When Exemptions Don’t Apply – The Gateways
If the company doesn’t qualify for an exemption, HMRC applies “gateways” to see which parts of the CFC’s profits are caught.
The main gateways are:
- UK-Related Activities
If work done in the UK helps the overseas company earn income.
Example:
A UK company provides marketing and product design to its subsidiary in Dubai, which books all sales.
Because most of the value creation happens in the UK, these profits may be subject to UK tax. - Non-Trading Finance Profits
If the CFC earns interest or royalties using funds sourced from the UK.
Example:
The UK parent lends £1m to its Singapore subsidiary, which then lends it to clients abroad.
The interest income may be caught under the CFC charge because the money originated from the UK. - Trading Finance Profits
Intra-group lending where finance profits relate to UK trading activities.
Example:
A CFC in Ireland lends to its UK parent company to fund operations, booking profits in Ireland.
HMRC may reallocate these profits back to the UK. - Captive Insurance Business
- Solo Consolidation (Banking)
These apply mainly to financial and insurance groups.
Case Study – UK Director Controlling a Foreign Company
Let’s look at a common scenario:
Emma, a UK-resident individual, is the sole director and 100% shareholder of Pacific Trading Ltd, a company registered in Cyprus.
The company’s work, decision-making, and client management are all run by Emma from her home office in London.
Tax impact:
- Even though the company is incorporated in Cyprus, its central management and control are in the UK.
- HMRC would likely treat Pacific Trading Ltd as UK tax resident, meaning its worldwide profits are fully taxable under UK Corporation Tax, not under CFC rules.
This distinction matters:
- If managed abroad, the company could be a CFC.
- If managed from the UK, it becomes UK resident — taxed directly in the UK, not via a CFC charge.
Key Takeaways
- The CFC rules stop UK businesses from parking profits in tax havens.
- Only UK-controlled, non-resident companies fall within the CFC regime.
- Exemptions protect companies with genuine overseas operations or low profits.
- If the real management is in the UK, the company might be UK tax resident instead — fully subject to UK Corporation Tax.
