Taxation (International and Other Provisions) Act 2010 section 259BD

Chargeable companies in respect of CFCs and foreign CFCs

Section 259BD determines how income arising to a controlled foreign company (CFC) or foreign CFC is treated as "ordinary income" of a chargeable company for the purposes of the hybrid mismatch rules, and when such income is considered "under taxed".

• When income arises to a CFC or foreign CFC that is either not taxed as ordinary income, or is under taxed in connection with a financial instrument or hybrid transfer arrangement, a three-step process determines whether the income is treated as "ordinary income" of a chargeable company rather than of the CFC itself.
• Step 1 identifies how much of the relevant income is included in the CFC's chargeable profits; Step 2 identifies which chargeable companies receive 25% or more of those profits; Step 3 allocates the relevant income to those companies in proportion to their share of the chargeable profits.
• Income is "under taxed" if the highest rate of tax actually charged on it (after taking into account credits for underlying tax) is less than the CFC's full marginal rate — that is, the highest rate at which that type of income could have been taxed.
• A "qualifying CFC amount" — being an amount brought into account for a foreign CFC charge — is treated as relevant income, but only to the extent it has not been reduced by specific exemptions, reliefs, credits, or refunds.

---