What are the CFC charging gateways?

The CFC rules use seven charging gateways to determine which profits are brought into charge. Only profits passing through a gateway are 'relevant CFC profits'. Key gateways include UK activities, artificial arrangements, and low-substance activities. The CFC rules use a gateway system to determine which profits are brought into charge. Only profits that pass through one of the seven charging gateways are 'relevant CFC profits'. The key gateways include: (1) Gateway 1 — profits arising from UK activities (where the CFC's profits arise from UK-related activities that would be taxable in the UK if performed by a UK company). (2) Gateway 2 — profits from artificial arrangements (where the CFC's profits arise from artificial arrangements designed to avoid UK tax). (3) Gateway 3 — profits from low-substance activities (where the CFC's profits arise from activities with insufficient economic substance). (4) Gateway 4-7 — additional gateways covering specific types of profits. The gateway system ensures that only profits that are genuinely attributable to UK-related or artificial activities are brought into charge. Profits that do not pass through any gateway are not chargeable, even if the CFC is subject to lower tax. Relevant legislation: TIOPA 2010, Chapter 4 of Part 9A (charging gateways); Schedule 15 TIOPA 2010 (gateway definitions). Example: A CFC in a low-tax jurisdiction earns profits from providing services to UK customers. If the profits arise from UK activities (Gateway 1), they may be brought into charge. If the CFC also earns profits from genuine overseas trading with non-UK customers, those profits do not pass through a gateway and are not chargeable. Common mistake: Assuming that all of a CFC's profits are brought into charge. Only profits passing through a gateway are chargeable — genuine overseas profits are generally not caught.

What exemptions are available from the CFC charge?

Several exemptions can eliminate or reduce the CFC charge: the 12-month exempt period, low profits exemption, low profit margin exemption, tax exemption (75%+ of UK rate), and excluded territories exemption. Several exemptions can eliminate or reduce the CFC charge: (1) Exempt period — the first 12 months of a CFC's existence are exempt from the CFC charge, giving time to establish the CFC's structure and activities. (2) Low profits exemption — if the CFC's profits are below a de minimis threshold (currently £50,000), no charge arises. (3) Low profit margin exemption — if the CFC's profit margin is below 10% (and the CFC is not in a jurisdiction on the 'naughty list'), no charge arises. (4) Tax exemption — if the CFC's profits are subject to tax at 75%+ of the UK corporation tax rate (currently 18.75%), no charge arises. (5) Excluded territories exemption — for CFCs in certain qualifying territories that meet specific conditions. (6) Property business exemption — profits from qualifying property businesses may be exempt. The exemptions can significantly reduce or eliminate the CFC charge, but the conditions must be met precisely. Specialist advice is needed to determine which exemptions apply. Relevant legislation: TIOPA 2010, Chapter 5 of Part 9A (exemptions); Schedule 16 TIOPA 2010 (exempt territories). Example: A CFC with profits of £40,000 qualifies for the low profits exemption (below £50,000 threshold) — no CFC charge arises. A CFC in a jurisdiction with a 20% tax rate qualifies for the tax exemption (20% is more than 75% of 25% UK rate = 18.75%) — no CFC charge arises. Common mistake: Not checking all available exemptions. Many CFCs qualify for at least one exemption, and failing to claim an exemption can result in an unnecessary CFC charge.

What are the CFC reporting requirements?

UK companies with CFCs must file CFC1 and CFC2 forms with the corporation tax return. The forms identify the CFC, its profits, the applicable gateway, and any exemptions claimed. Non-compliance can result in penalties. UK companies with CFCs must comply with reporting requirements: (1) CFC1 form — filed with the corporation tax return, identifying the CFC, its profits, the applicable charging gateway, and any exemptions claimed. The CFC1 is required for each CFC that has 'relevant CFC profits'. (2) CFC2 form — a more detailed form providing information about the CFC's structure, activities, and financial position. The CFC2 may be required for more complex CFCs or where specific gateways apply. (3) Reporting deadline — the CFC forms must be filed by the corporation tax return deadline (12 months after the end of the accounting period). (4) Record-keeping — detailed records must be maintained to support the CFC position, including financial statements, transfer pricing documentation, and evidence of exemptions. Non-compliance can result in penalties (up to £3,000 per form) and interest on any unpaid tax. Specialist advice is recommended to ensure the reporting is accurate and complete. Relevant legislation: TIOPA 2010, Chapter 8 of Part 9A (reporting requirements); Corporation Tax (CFC) Regulations 2012. Example: A UK company has a CFC in a low-tax jurisdiction. It files a CFC1 form with its corporation tax return, identifying the CFC, its profits of £500,000, the applicable gateway (Gateway 2 — artificial arrangements), and the exemption claimed (none). The CFC's profits of £500,000 are brought into charge to UK corporation tax at 25% = £125,000. Common mistake: Not filing the CFC forms on time. The deadline is the same as the corporation tax return (12 months after the end of the accounting period), and missing it can result in penalties.

How do CFC rules interact with transfer pricing rules?

CFC rules and transfer pricing rules can both apply to the same transaction. Transfer pricing determines the arm's length price for intercompany transactions, while CFC rules determine whether the resulting profits are brought into charge to UK tax. CFC rules and transfer pricing rules are complementary but serve different purposes: (1) Transfer pricing rules — ensure that transactions between connected parties are at arm's length. If the transfer price is not at arm's length, HMRC can adjust the profits of the UK company (or the CFC) to reflect the arm's length price. (2) CFC rules — determine whether the profits of a non-UK company (controlled by UK persons) are brought into charge to UK tax. The CFC rules apply after transfer pricing — the CFC's profits (as adjusted for transfer pricing) are tested against the CFC gateways and exemptions. The interaction works as follows: (a) The transfer pricing rules determine the arm's length price for transactions between the UK company and the CFC, which affects the CFC's profits. (b) The CFC rules then determine whether those profits are brought into charge to UK tax (based on the gateways and exemptions). (c) If the CFC rules apply, the profits are brought into charge to UK corporation tax. Specialist advice is needed to manage both transfer pricing and CFC compliance for multinational groups. Relevant legislation: TIOPA 2010, Part 9A (CFC rules); TIOPA 2010, Sections 147-148 (transfer pricing rules). Example: A UK company provides services to its CFC in a low-tax jurisdiction. The transfer pricing rules require the service fee to be at arm's length (e.g., £500,000). The CFC's profits (after the service fee) are tested against the CFC gateways. If the profits pass through a gateway and no exemption applies, they are brought into charge to UK tax. Common mistake: Considering transfer pricing and CFC rules in isolation. The two sets of rules interact, and the transfer pricing position affects the CFC's profits and the CFC charge.

International Tax › Corporate

Controlled Foreign Companies (CFC) Rules

CFC rules prevent UK companies from shifting profits to low-tax jurisdictions. Understand when the rules apply, the charging conditions, exemptions, and compliance requirements.

Book a Consultation +44 (0) 800 211 8657

The UK's Controlled Foreign Company (CFC) rules are designed to prevent UK companies from artificially diverting profits to overseas subsidiaries in low-tax jurisdictions. If the rules apply, the profits of the overseas subsidiary are brought into charge to UK corporation tax as if they were the UK company's profits. Understanding when the CFC rules apply and how to manage compliance is essential for multinational groups.

When CFC Rules Apply

CFC rules apply when: (1) A non-UK resident company is controlled by UK persons (25%+ ownership). (2) The company is subject to a lower rate of tax in its jurisdiction (generally less than 75% of the UK corporation tax rate). (3) The company's profits include 'relevant CFC profits' that pass through one of the charging gateways. If all three conditions are met, the CFC's profits may be brought into charge to UK corporation tax.

The Charging Gateways

The CFC rules use a gateway system to determine which profits are brought into charge. There are seven gateways, including: profits arising from UK activities, profits from artificial arrangements, and profits from low-substance activities. Only profits that pass through a gateway are 'relevant CFC profits' and potentially chargeable.

Exemptions

Several exemptions can eliminate or reduce the CFC charge: (1) Exempt period — the first 12 months of a CFC's existence. (2) Low profits exemption — if the CFC's profits are below a de minimis threshold. (3) Low profit margin exemption — if the CFC's profit margin is below 10%. (4) Tax exemption — if the CFC's profits are subject to tax at 75%+ of the UK rate. (5) Excluded territories exemption — for CFCs in certain qualifying territories. The exemptions can significantly reduce or eliminate the CFC charge.

Compliance and Reporting

UK companies with CFCs must comply with reporting requirements, including filing CFC1 and CFC2 forms with the corporation tax return. The reporting must identify the CFC, its profits, the applicable gateway, and any exemptions claimed. Non-compliance can result in penalties and interest.

Key Points

What You Need to Know

CFC rules apply to non-UK companies controlled by UK persons (25%+ ownership)
The company must be subject to a lower rate of tax abroad
Only profits passing through a charging gateway are brought into charge
Several exemptions can eliminate or reduce the CFC charge
Compliance requires filing CFC1 and CFC2 forms with the tax return

Expert Answers

International Tax Frequently Asked Questions

Detailed answers with legislation references, practical examples and common pitfalls.

Explore More

All International Tax Topics

Statutory Residence Test (SRT)Non-Dom Reforms April 2025 Overseas Workday Relief (OWR)Split-Year Treatment Double Taxation Treaties Transfer Pricing Permanent Establishment (PE)Controlled Foreign Companies (CFC)Withholding Tax on Cross-Border Payments Inbound Property Investment Outbound Expansion Structuring Cross-Border Employment Taxation Diverted Profits Tax (DPT)Anti-Hybrid & Mismatch Rules Corporate Interest Restriction Exit Charges & Company Migration Cross-Border Trust Taxation

Need Specialist International Tax Advice?

Our tax advisers can help you navigate international tax with clear, practical advice tailored to your circumstances.

Book a Consultation Call +44 (0) 800 211 8657