Taxation (International and Other Provisions) Act 2010 section 371NB

The basic rule

Section 371NB sets out the three-step test used to determine whether a controlled foreign company qualifies for the tax exemption in a given accounting period, based on comparing the tax it pays locally with the tax it would have paid in the UK.

• The CFC must have an identifiable territory of residence for the accounting period; if it does not, the tax exemption cannot apply.
• The tax actually paid by the CFC in its territory of residence (the "local tax amount") must be calculated, subject to certain reductions, and must not have been determined under special "designer rate" tax provisions — otherwise the exemption is automatically denied.
• The exemption applies if the local tax amount is at least 75% of the corresponding UK tax that would have been due on the same profits.
• Where tax is paid on a consolidated or combined basis covering more than just the CFC's own profits, the amount attributable to the CFC's local chargeable profits must be apportioned on a just and reasonable basis.