Introduction Details of the Schedule Part 1.Controlled Foreign Companies Chapter 4 - the CFC charge gateway: profits attributable to UK Activities
90.Chapter 4 applies subject to the conditions given in section 371CA. It determines whether any of a CFC’s assumed total profits pass through the CFC charge gateway (see section 371BB) because of UK activities that contribute to those profits. New section 371DB sets out the steps by which any profits falling within this chapter are calculated, but this is subject to the exclusions provided for in the rest of Chapter 4.
91.New section 371DA introduces the Chapter. New section 371DA(2) excludes non-trading finance profits and property business profits from the CFC’s assumed total profits for the purposes of the Chapter.
92.New subsection (3) defines, for the purposes of the Chapter, the following terms: “the OECD Report”, “the CFC group”, “the provisional Chapter 4 profits”, “the relevant assets and risks”, “SPF”, “UK SPF” and “non-UK SPF”. Subsection (3)(b) specifies that terms used which are also used in the OECD Report have the same meaning for the purposes of the Chapter as they have in that report.
93.New subsection (4) provides that the Treasury may by regulations amend Chapter 4 to take account of any “relevant document” published by the OECD. New subsection (5) defines “relevant document” as one which replaces, updates or supplements the OECD Report, or one that replaces, updates or supplements one which is itself a “relevant document”.
94.New section 371DB(1) sets out the steps to determine the Chapter 4 profits which are to be taken in accordance with the principles set out in the OECD Report so far as relevant.
	Step 1 is to identify the assets the CFC has or has had and the risks it bears or has borne, in so far as they give rise to the CFC’s profits.  It calls these “the relevant assets and risks”.
	Step 2 is to exclude from the relevant assets and risks any asset or risk if the CFC’s assumed total profits are only negligibly higher than they would have been if the CFC had not held that asset or borne that risk to any extent at all. This exclusion applies only if the excluded assets or risks together increase the CFC’s profits by only a negligible amount (see new section 371DB(2) to (4))
	Step 3 is to identify, based on the assumption that the CFC group is a single company, the SPFs carried out by the CFC group which are relevant to the economic ownership of assets and the taking on and management of risks.  The assets and risks that this step is concerned with are those included in the relevant assets and risks from Step 2.
	Step 4 is to determine the extent to which the SPFs identified in the previous step are UK SPFs and the extent to which they are non-UK SPFs.  If none of them is a UK SPF, then no profits fall within Chapter 4 and no further steps are to be taken.
	Step 5 is to assume that the identified UK SPFs are carried out by a UK permanent establishment of the CFC and then to determine the extent to which the assets and risks identified at Step 1 would be attributed to that permanent establishment.  It is also assumed for this step that any non-UK SPFs are carried out by the CFC itself.
	Step 6 is to exclude assets and risks to which new section 371DC (see below) applies from the relevant assets and risks.
	Step 7 is to re-determine the CFC’s assumed total profits as if the CFC did not hold the assets and did not bear the risks included in the relevant assets and risks so far as they would be attributed to the permanent establishment at Step 5.  “The provisional Chapter 4 profits” are defined as the amount of CFC’s assumed total profits left out of the Step 7 re-determined profits.
	Step 8 is to determine the profits that fall within the Chapter by excluding from the provisional Chapter 4 profits amounts excluded by new sections 371DD to 371DF.
95.New section 371DC provides for the exclusion of assets and risks at Step 6 in section 371DB(1) where most of the SPFs are not UK SPFs. New section 371DC(1) applies the exclusion to an asset or risk included in the relevant assets and risks where amount A is not more than 50 per cent of amount B. Amounts A and B are defined by subsections (2) and (3) respectively.
96.New subsection (2) defines amount A as the total of the gross amounts of the CFC’s income defined by subsection (2)(a) and additional expenses defined by subsection (2)(b).
97.The gross amounts of the CFC’s income are those that would not have become receivable during the accounting period if the CFC had not held the asset or borne the risk so far as it would be attributed to the permanent establishment mentioned at step 5 in section 371DB(1). An example of such a receipt is a royalty (or part royalty) that the CFC would not have received if it did not hold the relevant Intellectual Property (IP) (or did not hold the whole of it).
98.The additional expenses are those that the CFC would have incurred if it had not held the asset or borne the risk so far as it would be attributed to the permanent establishment mentioned at step 5. An example of such an expense would be a royalty for the use of IP that the CFC would have to pay if it did not hold the IP itself (or did not hold the whole of it).
99.New subsection (3) defines amount B as the total of the gross amounts of the CFC’s income defined by subsection (3)(a) and additional expenses defined by subsection (3)(b). The gross amounts of the CFC’s income are those that would not have become receivable during the accounting period if the CFC had not held the asset or borne the risk to any extent at all. The additional expenses are those that the CFC would have incurred if it had not held the asset or borne the risk to any extent at all.
100.The exclusion therefore applies if the attribution of assets or risks to UK SPFs required by Step 5 of section 371DB reduces gross income, or increase expenses by less than half of the amount that would follow if the assets or risks were not owned or borne by the CFC at all.
101.New subsections (4) and (5) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.
102.New section 371DD excludes amounts from the provisional Chapter 4 profits where substantial economic value, other than tax savings, arises from the CFC’s holding of assets or its bearing of risks.
103.New section 371DD(1) and (2) exclude amounts from its provisional Chapter 4 profits if:
	the CFC’s holding of the asset or its bearing of the risk gives rise to non-tax value for the CFC group; and
	that value (as qualified by subsection (4)) is a substantial proportion of the “net economic value” resulting from the CFC’s holding the assets or bearing the risks.
104.New subsection (3) defines the term “net economic value” used in subsection (2). It excludes value directly or indirectly derived from the reduction or elimination of any person’s liability to tax or duty imposed under the law of any territory outside the United Kingdom.
105.New subsection (4) defines the term “relevant non-tax value” used in subsection (2). It is the part of the value which results from the CFC holding the asset or bearing the risk that does not derive from the reduction or elimination of any person’s UK tax or duty.
106.Overall therefore, non-tax value which results from the CFC holding the asset or bearing the risk is compared to the aggregate of non-tax value and value derived from the UK tax advantage. Foreign tax effects are wholly disregarded for the purposes of this comparison.
107.New subsections (5) and (6) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.
108.New section 371DE excludes amounts from the provisional Chapter 4 profits where they arise from arrangements that independent companies would have entered into.
109.New section 371DE(1) sets out the circumstances in which subsection (2) will apply.
110.New subsection (2) excludes the amount arising from the arrangements identified in subsection (1), if it is reasonable to suppose that if the UK SPFs were not carried out by companies connected with the CFC then the CFC would enter into arrangements with companies it was not connected with and that those arrangements would:
	be structured in the same way as the actual arrangements; and
	have the same commercial effect in relation to the CFC’s business.
111.New subsections (3) and (4) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.
112.New section 371DF introduces an exclusion from Chapter 4 for trading profits. If all the conditions for the exclusion to apply are met, then all the trading profits of the CFC are excluded from the provisional Chapter 4 profits, and therefore exempt from a CFC charge.
113.With the exception of the management expenditure condition in new section 371DI, the conditions only apply on an entity basis, so that a CFC as a whole will either meet or fail the conditions. The conditions provide an alternative to consideration of the detailed SPF provisions in Chapter 4.
114.New section 371DF(1) sets out the conditions to be met. Those conditions are set out in subsequent sections, and relate to:
	business premises;
	UK Income;
	management expenditure;
	IP; and
	export of goods from the UK.
115.New section 371DF(2) also excludes trading profits from a CFC charge under Chapter 4 in accordance with the management expenditure condition in new section 371DI. The management expenditure condition can be applied to the whole of a CFC or to certain assets or risks of the CFC. This subsection allows for trading profits which arise from certain assets or risks to be excluded from a CFC charge.
116.New subsection (3) provides that the exclusion is subject to an anti-avoidance rule in section 371DL.
117.New section 371DG sets out the business premises condition. New section 371DG(2) requires the CFC to have premises with a degree of permanence in its territory of residence throughout the accounting period, and that those premises are the sole or main base from which the CFC’s activities in that territory are carried on.
118.New subsection (3) defines premises to include an office, factory, mine or oil well, and a building site where the work will last at least 12 months.
119.New section 371DH sets out the UK income condition. New section 371DH(2) requires that no more than 20 per cent of the CFC’s “relevant trading income” comes directly or indirectly from UK resident persons or UK permanent establishments.
120.New subsection (3) defines “relevant trading income” as the trading income of the CFC excluding any income from UK sales of goods produced in the CFC’s territory of residence.
121.New subsections (4) and (5) set out an alternative UK income condition for a CFC whose main business is banking business which is regulated in its territory of residence. The condition is that the “relevant UK trading income” is no more than 10 per cent of the CFC’s total trading income. For this purpose, new subsection (6) defines “relevant UK trading income” as trading income derived directly or indirectly from UK resident persons or UK permanent establishments, excluding interest received from UK resident companies which are connected or associated with the CFC.
122.New subsection (7) restricts the application of the trading income condition in relation to income from UK companies which have made an exemption election in relation to PEs. In such cases, income is disregarded if the corresponding expense is taken into account for the purposes of section 18A of CTA 2009.
123.New section 371DI sets out the management expenditure condition.
124.New section 371DI(2) and (3) limit “UK related management expenditure” to 20 per cent of “total related management expenditure”
125.New subsection (3) defines “total related management expenditure” as the total expenditure incurred by the CFC in relation to staff or other individuals who carry out “relevant management functions.” A relevant management function is defined in new subsection (5) as a function whereby a person manages or controls any of the relevant assets or risks of the CFC. Relevant assets or risks are defined at section 371DB(1) as assets and risks which give rise to profits.
126.The expenditure incurred by the CFC is categorised in subsection (3)(a) to (c) and covers expenditure incurred on staff or other individuals, and on the engagement of related companies. The related companies’ expenditure is itself limited to amounts which relate to the engagement of staff or other individuals.
127.Expenditure in relation to individuals who are not members of staff is included in related management expenditure if those individuals carry out relevant management functions as the result of an arrangement between the CFC or related company and that individual.
128.New subsection (4) defines “UK related management expenditure” as related management expenditure which relates to staff or other individuals who carry out relevant management functions in the UK.
129.New subsection (6) provides an example of a person carrying out relevant management functions, as a person who formulates plans or makes decisions in relation to the acquisition, creation, development or exploitation of assets, or the taking on or bearing of risks. This definition matches the definition of assets or risks that are “UK managed” which is provided by section 371CA(4) in Chapter 3, which determines whether Chapter 4 applies.
130.New subsections (7) to (9) apply in circumstances where the 20 per cent management expenditure condition in subsection (2) is not met, but all the other trading income safe harbour conditions are met. If, for any given asset or risk, the UK related management expenditure is not more than 50 per cent of the total related management expenditure for that asset or risk, then this 50 per cent condition is met and the trading profits which arise from that asset or risk are excluded from the provisional Chapter 4 profits (see Step 7 of section 371DB(1)).
131.New subsections (10) and (11) allow assets or risks which it is not reasonably practicable to separate for the purposes of the 50 per cent condition set out in subsections (7) to (9) to be considered together in the application of that condition.
132.New section 371DJ sets out the IP condition.
133.The condition is met unless IP has been transferred to the CFC from related parties in the UK within the previous six years and the transfer has had a significant impact on the profits of the CFC, the total IP held by the CFC, or the value of IP held by the transferor.
134.New section 371DJ(2)(a) defines “the exploited IP”. New section 371DJ(2)(b) then asks whether any of that exploited IP was transferred to the CFC by related parties at any time during the accounting period or the previous six years (see subsection (5)) or otherwise derived (directly or indirectly) out of or from IP held at times during that period by persons related to the CFC.
135.New subsection (2)(c) asks whether, as a result of those IP transfers, the value of IP held by the related party transferors is significantly less than it would otherwise have been.
136.New subsection (2)(d) then applies the significance condition in all cases where the transferred (or derived) IP is less than the total exploited IP held by the CFC. In cases where all of the exploited IP has been transferred to the CFC by related parties (or otherwise derived as mentioned in subsection (2)(b)), the significance condition does not apply.
137.New subsection (3) contains the significance condition, which is met if IP which has been transferred from the UK (or otherwise derived as mentioned in subsection (2)(b)) forms a significant part of the total exploited IP of the CFC, or if the transfer (or other derivation) of IP from the UK produces CFC profits which are significantly higher than they otherwise would have been. The part of the exploited IP transferred from the UK is referred to as “the UK derived IP”.
138.New subsection (4) limits the scope of the section in relation to transfers or holding of IP from non-UK resident related persons. Such transfers or holding of IP are relevant only if the IP was held for the purposes of a UK permanent establishment of the non-UK resident person.
139.New subsection (5) defines “the relevant period” as the period covering the accounting period and the previous six years.