Controlled foreign companies basics

The controlled foreign company (CFC) rules in Part 9A of the Taxation (International and Other Provisions) Act 2010 charge a UK resident company on its share of certain profits of a non UK resident company that UK persons control. Only profits that pass through the “CFC charge gateway”, broadly profits artificially moved out of the UK, are caught, and nothing is charged if one of five entity level exemptions applies. A UK company is only charged if at least 25% of the CFC’s chargeable profits are apportioned to it and its connected or associated persons.

What counts as a controlled foreign company?

Section 371AA(3) of TIOPA 2010 defines a CFC as a non UK resident company controlled by a UK resident person or persons. Control is explained in Chapter 18 of Part 9A, which also treats some companies as CFCs even though UK persons do not control them outright. A company can be a CFC whatever its size and wherever it is resident; the rules then decide whether any of its profits are taxed in the UK.

The CFC rules are aimed at subsidiaries. A UK company’s own overseas branch is part of the UK company, and its profits are taxed in the UK unless the company makes the foreign branch exemption election, which has its own anti diversion rule built on the CFC tests.

How is the CFC charge worked out?

Section 371BA says the charge applies to a CFC’s accounting period only if the CFC has chargeable profits and none of the exemptions in Chapters 10 to 14 applies. Chargeable profits are the CFC’s assumed taxable total profits, computed as if it were a UK company, but limited to the profits that pass through the gateway.

Section 371BC then sets out the steps:

Identify the persons with relevant interests in the CFC during the period. If none is a UK resident company, there is no charge.
Work out the CFC’s creditable tax, which includes foreign tax on its profits.
Apportion the chargeable profits and creditable tax among the relevant persons.
Test each UK resident company to see if it is a chargeable company.
Charge each chargeable company corporation tax at the appropriate rate on its percentage of chargeable profits, less its percentage of creditable tax.

The charge is treated as corporation tax of the UK company for its accounting period in which the CFC’s accounting period ends. The appropriate rate is the corporation tax rate that applies to that UK company’s profits; the main rate for the financial year starting 1 April 2026 is 25%.

Under section 371BD a UK company is a chargeable company only if the percentage of chargeable profits apportioned to it, added to the percentages apportioned to persons connected or associated with it, is at least 25%. Small portfolio holdings are therefore outside the charge.

What is the CFC charge gateway?

Section 371BB uses Chapter 3 to decide which of Chapters 4 to 8 apply, and only profits falling within an applicable chapter pass through the gateway. The chapters are:

Chapter 4, profits attributable to UK activities. This is the main test for ordinary trading groups. Section 371CA switches it off if any one of four conditions is met: the CFC holds no assets and bears no risks under arrangements with a main purpose of reducing UK tax; it has no UK managed assets or risks; it could run its business effectively itself if UK management stopped; or (condition D) its assumed total profits consist only of non trading finance profits, property business profits or both. Where it does apply, it catches profits from assets and risks that are managed by people in the UK.
Chapter 5, non trading finance profits, such as interest on loans funded from UK capital.
Chapter 6, trading finance profits where the CFC has more free capital than an independent company would, funded from the UK.
Chapter 7, captive insurance business.
Chapter 8, solo consolidation for regulated banks.

Chapter 9 gives a partial exemption for group finance companies. Where a chargeable company claims under section 371IA, 75% of the profits of a qualifying loan relationship are exempt under section 371ID, so only a quarter of those finance profits is charged; some loans qualify for full exemption.

Which exemptions take a CFC out of the rules entirely?

If any of these applies for an accounting period, there is no CFC charge for that period, whatever the gateway would otherwise catch.

Exemption	Basic rule
Exempt period (Chapter 10)	When a company already carrying on a business first comes under UK control, it gets an exempt period of 12 months, which HMRC can extend on a notice given before the period ends (section 371JD), provided it is not charged in the following period.
Excluded territories (Chapter 11)	The CFC is resident in a territory listed in HMRC regulations and certain categories of income total no more than the greater of £50,000 and 10% of its accounting profits (sections 371KB and 371KD), with an intellectual property condition and no tax advantage arrangements.
Low profits (Chapter 12)	Accounting profits or assumed taxable total profits of no more than £50,000, or no more than £500,000 of which no more than £50,000 is non trading income (section 371LB). Amounts are reduced for periods under 12 months.
Low profit margin (Chapter 13)	Accounting profits, before interest, of no more than 10% of relevant operating expenditure (section 371MB).
Tax exemption (Chapter 14)	Local tax paid is at least 75% of the corresponding UK tax, and the local tax is not set under designer rate provisions (section 371NB).

The low profits exemption does not apply where the CFC’s business is wholly or mainly providing UK intermediary services, where a UK resident individual personally performs services in the UK through the CFC, or where arrangements were made to bring profits under the limits (section 371LC).

How does it work in a simple case?

Illustration only. UK Co owns 100% of SubCo, resident in Country X, which taxes it at 10%. SubCo distributes goods it buys from third parties and makes profits of £800,000 a year, so the low profits exemption is not available, and the 10% local tax is less than 75% of the UK equivalent of 25%, so the tax exemption fails.

That does not mean a charge. SubCo’s sales, buying and stock decisions are made by its own staff in Country X, and it has no UK managed assets or risks, so condition B in section 371CA is met and Chapter 4 does not apply. SubCo holds no surplus cash lent to group companies, so Chapter 5 does not apply either. No profits pass through the gateway and UK Co has no CFC charge.

If instead SubCo also held a valuable brand that UK Co’s marketing team developed and managed from London, the profit from that brand could fall within Chapter 4. UK Co would then pay corporation tax at 25% on that slice of profit, less the 10% Country X tax on it.

How is a CFC reported?

The charge is self assessed by the UK company. HMRC says the supplementary pages CT600B should be used if the company held an interest of 25% in a foreign company controlled from the UK at any time in the accounting period, and the CFC’s accounting period ended within, or at the same time as, the company’s own period. See the CT600 return for how the supplementary pages fit in.

What mistakes come up most often?

Assuming that a low tax subsidiary is automatically caught. Most trading subsidiaries with real local management fall outside Chapter 4.
Relying on the low profits exemption for a company whose business is supplying a UK individual’s personal services.
Forgetting the 25% threshold includes connected and associated persons’ shares, not just the company’s own holding.
Not keeping evidence of where key decisions are taken. The gateway tests turn on facts about people and management, so board minutes and job descriptions are often what HMRC asks for in an enquiry.
Overlooking group lending. Interest earned by a foreign subsidiary on loans funded from the UK is where Chapter 5 most often bites; see loan relationships basics for how such profits are computed.
Treating the CFC rules as a substitute for transfer pricing. Pricing between UK Co and the CFC must still be at arm’s length where the transfer pricing rules apply.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.