Income and Corporation Taxes Act 1988

6 (1) Throughout an accounting period a controlled foreign company is engaged in exempt activities if, and only if, each of the following conditions is fulfilled—

(a) that, throughout that accounting period, the company has a business establishment in the territory in which it is resident; and

(b) that, throughout that accounting period, its business affairs in that territory are effectively managed there; and

(c) that any of sub-paragraphs [F1 (2), (3), (4) or (4A)] below applies to the company.

(2) This sub-paragraph applies to a company if—

(a) at no time during the accounting period in question does the main business of the company consist of either—

(i) investment business, or

(ii) dealing in goods for delivery to or from the United Kingdom or to or from connected or associated persons; and

(b) in the case of a company which is mainly engaged in wholesale, distributive [F2 financial or service] business in that accounting period, less than 50 per cent. of its gross trading receipts from that business is derived directly or indirectly from [F3 persons falling within sub-paragraph (2A) below.]

[F4 (2A) Those persons are—

(a) persons who are connected or associated with the company;

(b) persons who have a 25 per cent assessable interest in the company in the case of the accounting period in question; F5 . . .

(c) if the company is a controlled foreign company in that accounting period by virtue of subsection (1A) of section 747, persons who are connected or associated with either or both of the two persons mentioned in that subsection [F6 ;

(d) persons not falling within paragraphs (a) to (c) above which are companies resident in the United Kingdom;

(e) persons not falling within paragraphs (a) to (c) above which are companies not resident in the United Kingdom which carry on business through a [F7 permanent establishment] in the United Kingdom;

(f) persons not falling within paragraphs (a) to (c) above who are individuals habitually resident in the United Kingdom;

but where the company is a controlled foreign company falling within sub-paragraph (2B) below, paragraphs (d) to (f) above shall be disregarded.]]

[F8 (2B) A controlled foreign company falls within this sub-paragraph if either—

(a) its main business is the effecting or carrying out of contracts of long-term insurance, other than protection business; or

(b) it is a member of an insurance group and its main business is insuring or reinsuring large risks.

Paragraph 11A below has effect for the interpretation of this sub-paragraph.

(2C) For the purposes of sub-paragraph (2)(b) above, a company’s gross trading receipts from a business shall be regarded as directly or indirectly derived from a person falling within sub-paragraph (2A)(e) above only to the extent that they are derived directly or indirectly from contracts or other arrangements relating to that person’s [F7 permanent establishment] in the United Kingdom.]

(3) This sub-paragraph applies to a company which is a holding company if at least 90 per cent. of its gross income during the accounting period in question [F9 is received by it in the territory in which it is resident and] is derived directly from companies which it controls and which, throughout that period—

(a) are resident in the territory in which the holding company is resident; and

(b) are not themselves holding companies [F10 or superior holding companies], but otherwise are, in terms of this Schedule, engaged in exempt activities [F11 or are, in terms of sub-paragraph (5A) below, exempt trading companies] ;

and a holding company to which this sub-paragraph applies is in this Part of this Schedule referred to as a “local holding company”.

(4) This sub-paragraph applies to a company which is a holding company, but not a local holding company, if at least 90 per cent. of its gross income during the accounting period in question [F12 falls within sub-paragraph (4ZA) below and] is derived directly from companies which it controls and which, throughout that period—

(a) are local holding companies; or

(b) are not themselves holding companies (whether local or not) [F13 or superior holding companies], but otherwise are, in terms of this Schedule, engaged in exempt activities [F14 or are, in terms of sub-paragraph (5A) below, exempt trading companies].

[F15 (4ZA) For the purposes of sub-paragraph (4) above, income of the holding company falls within this sub-paragraph if—

(a) the company from which the holding company directly derives the income is, throughout the accounting period in question, resident in the territory in which the holding company is resident and the income is received by the holding company in that territory; or

(b) the income consists of qualifying dividends.]

[F16 (4A) This sub-paragraph applies to a company which is a superior holding company if at least 90 per cent. of its gross income during the accounting period in question—

(a) represents qualifying exempt activity income of its subsidiaries; and

(b) is derived directly from companies which it controls and which fall within sub-paragraph (4B) below[F17 ; and

(c) falls within sub-paragraph (4AA) below.]

[F18 (4AA) For the purposes of sub-paragraph (4A) above, income of the superior holding company falls within this sub-paragraph if—

(a) the company from which the superior holding company directly derives the income is, throughout the accounting period in question, resident in the territory in which the superior holding company is resident and the income is received by the superior holding company in that territory; or

(b) the income consists of qualifying dividends.]

(4B) For the purposes of paragraph (b) of sub-paragraph (4A) above, a company falls within this sub-paragraph if—

(a) throughout the accounting period mentioned in that sub-paragraph, it is not itself a superior holding company but otherwise is, in terms of this Schedule, engaged in exempt activities or is, in terms of sub-paragraph (5A) below, an exempt trading company; or

(b) it is itself a superior holding company throughout that period and at least 90 per cent of its gross income during that period—

(i) represents qualifying exempt activity income of its subsidiaries, and

(ii) is derived directly from companies which it controls and which themselves fall within this paragraph or paragraph (a) above[F19 ; and

(iii) falls within sub-paragraph (4BB) below].]

[F20 (4BB) For the purposes of sub-paragraph (4B)(b) above, income of the superior holding company there mentioned falls within this sub-paragraph if—

(a) the company from which that superior holding company directly derives the income is, throughout the accounting period in question, resident in the territory in which that superior holding company is resident and the income is received by that superior holding company in that territory; or

(b) the income consists of qualifying dividends.]

[F21 (4C) For the purposes of sub-paragraph [F22 (2A)(b)] above, a person has a 25 per cent. assessable interest in a controlled foreign company in the case of an accounting period of the company if, on an apportionment of the chargeable profits and creditable tax (if any) of the company for that accounting period under section 747(3), at least 25 per cent. of the controlled foreign company’s chargeable profits for the accounting period would be apportioned to that person.]

(5) Any reference in [F23 sub-paragraphs (3) to (4B)] above to a company which a holding company [F24 or superior holding company] controls includes a reference to a trading company [F25 to which sub-paragraph (5ZA) or (5ZB) below applies.

(5ZA) This sub-paragraph applies to a trading company] in which the holding company [F24 or superior holding company] holds the maximum amount of ordinary share capital which is permitted under the law of the territory—

(a) in which the trading company is resident; and

(b) from whose laws the trading company derives its status as a company.

[F26 (5ZB) This sub-paragraph applies to a trading company if—

(a) it is a controlled foreign company by virtue of subsection (1A) of section 747; and

(b) the person who satisfies the requirement in paragraph (b) of that subsection in relation to the company also controls the holding company or superior holding company.]

[F27 (5A) For the purposes of sub-paragraphs (3) to (4B) above, a company is an exempt trading company throughout any period if—

(a) it is a trading company throughout each of its accounting periods which falls wholly or partly within that period; and

(b) each of those accounting periods is one as regards which—

(i) the condition in section 747(1)(c) is not satisfied; or

(ii) the conditions in section 748(1)(e) are satisfied; or

(iii) the conditions in section 748(3)(a) and (b) are satisfied.]

[F28 (5B) In this paragraph “qualifying dividend” means any dividend other than one for which the company paying the dividend is entitled to a deduction against its profits for tax purposes under the law of the territory in which it is resident.]

(6) The following provisions of this Part of this Schedule have effect in relation to sub-paragraphs (1) to [F29 (4BB)] above.

Textual Amendments

F1 Words in Sch. 25 para. 6(1)(c) substituted (retrospective to 27.11.2002 with effect in accordance with s. 200(2)(3) of the amending Act) by Finance Act 2003 (c. 14), s. 200(4), Sch. 42 para. 2(2)

F2 Words in Sch. 25 para. 6(2)(b) substituted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 5(2)(a)

F3 Words in Sch. 25 para. 6(2)(b) substituted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 5(2)(b)

F4 Sch. 25 para. 6(2A) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 5(3)

F5 Word in Sch. 25 para. 6(2A) repealed (retrospective to 27.11.2002 with effect in accordance with s. 200(2)(3) of the repealing Act) by Finance Act 2003 (c. 14), s. 200(4), Sch. 42 para. 2(3), Sch. 43 Pt. 5(2)

F6 Sch. 25 para. 6(2A)(d)-(f) and words inserted (retrospective to 27.11.2002 with effect in accordance with s. 200(2)(3) of the amending Act) by Finance Act 2003 (c. 14), s. 200(4), Sch. 42 para. 2(3)

F7 Words in Sch. 25 para. 6(2A)(e)(2C) substituted (with effect in accordance with s. 153(4) of the amending Act) by Finance Act 2003 (c. 14), s. 153(1)(a)

F8 Sch. 25 para. 6(2B)(2C) inserted (retrospective to 27.11.2002 with effect in accordance with s. 200(2)(3) of the amending Act) by Finance Act 2003 (c. 14), s. 200(4), Sch. 42 para. 2(4)

F9 Words in Sch. 25 para. 6(3) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 6(2)

F10 Words in Sch. 25 para. 6(3)(b) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(4)(a); S.I. 1998/3173, art. 2

F11 Words in Sch. 25 para. 6(3)(b) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(4)(b); S.I. 1998/3173, art. 2

F12 Words in Sch. 25 para. 6(4) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(2)

F13 Words in Sch. 25 para. 6(4)(b) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(5)(a); S.I. 1998/3173, art. 2

F14 Words in Sch. 25 para. 6(4)(b) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para 30(5)(b); S.I. 1998/3173, art. 2

F15 Sch. 25 para. 6(4ZA) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(3)

F16 Sch. 25 para. 6(4A)(4B) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(6); S.I. 1998/3173, art. 2

F17 Sch. 25 para. 6(4A)(c) and preceding word added (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(4)

F18 Sch. 25 para. 6(4AA) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(5)

F19 Sch. 25 para. 6(4B)(b)(iii) and preceding word added (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(6)

F20 Sch. 25 para. 6(4BB) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(7)

F21 Sch. 25 para. 6(4C) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(7); S.I. 1998/3173, art. 2

F22 Words in Sch. 25 para. 6(4C) substituted (retrospective to 27.11.2002 with effect in accordance with s. 200(2)(3) of the amending Act) by Finance Act 2003 (c. 14), s. 200(4), Sch. 42 para. 2(5)

F23 Words in Sch. 25 para. 6(5) substituted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(8)(a); S.I. 1998/3173, art. 2

F24 Words in Sch. 25 para. 6(5) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(8)(b); S.I. 1998/3173, art. 2

F25 Words in Sch. 25 para. 6 inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(8)

F26 Sch. 25 para. 6(5ZB) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(9)

F27 Sch. 25 para. 6(5A) inserted (with effect in accordance with Sch. 17 para. 37 of the amending Act) by Finance Act 1998 (c. 36), Sch. 17 para. 30(9); S.I. 1998/3173, art. 2

F28 Sch. 25 para. 6(5B) inserted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(10)

F29 Word in Sch. 15 para. 6(6) substituted (with effect in accordance with Sch. 31 para. 9(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 31 para. 7(11)