What are the controlled foreign company rules?
Answered 11 March 2026
Controlled Foreign Company (CFC) Rules
What the law says
Definition of a CFC
Under the legislation (originally ICTA88/S747(1), now modernised into Part 9A of TIOPA 2010), a company is a "controlled foreign company" if in any accounting period it is:
- resident outside the United Kingdom,
- controlled by persons resident in the United Kingdom, and
- subject to a lower level of taxation in its territory of residence.
There is no separate definition of "company" in the CFC rules; the general definition at CTA2010/S1121 (any body corporate or unincorporated association, but not a partnership) applies.
The "lower level of taxation" test
A foreign company is subject to a lower level of taxation if the tax it has paid in its territory of residence is less than three-quarters of the Corporation Tax it would have paid had it been resident in the UK.
The CFC Charge
Where a company is a CFC and no exemption applies, the chargeable profits and creditable tax of the CFC are apportioned among persons with an interest in it. Assessments under the CFC rules are only made on UK-resident companies. The charge is a sum equal to Corporation Tax at the full rate on the apportioned profits, less any creditable tax included in the apportionment, and is payable as if it were an amount of Corporation Tax.
Relevant interests
Only UK-resident companies with a "relevant interest" in a CFC are subject to the apportionment charge. A UK-resident company has a relevant interest if it holds a direct or indirect interest in the CFC, unless that interest is held through another UK-resident company (ICTA88/S752A).
Exemptions from the CFC charge
The exemptions from the CFC charge are set out in Chapters 11 to 14 of Part 9A of TIOPA 2010.
Relief against the CFC charge
Where a dividend representing apportioned chargeable profits is later charged to tax in the hands of a UK recipient, double taxation relief is available. Tax paid under the CFC rules is treated as foreign tax qualifying for credit relief as underlying tax under the double taxation relief rules in TIOPA 2010.
Note: Section 371UD of TIOPA 2010 (relief against the sum charged) was abolished by FA 2015 for CFC accounting periods beginning on or after 8 July 2015.
HMRC guidance / practice
Core purpose of the rules
The CFC rules are designed to prevent UK groups from diverting profits to low-tax overseas subsidiaries. Typical avoidance structures include: diverting profits via intra-group loans, locating intellectual property in a CFC, routing group company ownership through a CFC, treasury operations, captive insurance, and sales/supply chain arrangements.
EEA modifications following Cadbury Schweppes
FA07/SCH15 amended the CFC rules with effect from 6 December 2006 following the European Court of Justice decision in Cadbury Schweppes plc v Commissioners of Inland Revenue (Case C-196/04). The ECJ held that CFC rules are compatible with EU law on Freedom of Establishment only so long as they are not applied to profits of genuine economic activities in an actual establishment in another Member State. The UK amended its legislation to reflect this explicitly.
As a result, where a CFC has individuals working for it in a business establishment in another EEA state, UK owners may apply to HMRC for the CFC's apportionable profits to be reduced by the "net economic value" created directly by the work of those individuals. HMRC must grant the application if the criteria are met, and the CFC's chargeable profits and creditable tax are treated as reduced accordingly.
Non-local source income
SI1998/3081 Regulation 5(3) specifies what constitutes non-local source income for CFC purposes, including: distributions from companies outside the CFC's territory of residence; income and gains on loans or deposits with persons outside that territory; royalties paid by persons resident outside the territory; and premiums/rents in respect of property situated outside the territory.
Acceptable Distribution Policy (ADP)
The ADP exemption (requiring a CFC to pay at least 90% of its net chargeable profits as a dividend to the UK) was repealed by FA09/SCH16 for CFC accounting periods beginning on or after 1 July 2009.
Summary
The CFC rules are an anti-avoidance regime that taxes UK-resident companies on their proportionate share of the undistributed profits of low-taxed foreign subsidiaries they control. The modern rules are found in Part 9A of TIOPA 2010, replacing the older Chapter IV of Part XVII of ICTA 1988. The rules operate through a "CFC charge gateway" which identifies which profits are chargeable, subject to a range of exemptions. Relief is available to prevent double taxation when profits are subsequently distributed to the UK.
Citation sources
FA07/SCH15 included legislation that amends the UK controlled foreign companies’ rules with effect from 6 December 2006. This represents the Government’s response to the decision of the European Court of Justice on 12 September 2006 in the case of Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue (case C-196/04). The case concerned the compatibility of controlled foreign companies’ rules with the Freedom of Establishment provided by the EU treaty, which allo
PART 4 Income tax, corporation tax and capital gains tax Corporation tax CFC charge: abolition of relief 36 1 In Part 9A of TIOPA 2010 (controlled foreign companies), omit section 371UD (relief against sum charged). 2 Accordingly, omit the following provisions— a in CTA 2010, section 398D(6) and (6A); b in FA 2012, in Schedule 20, paragraph 38; c in FA 2015, in Schedule 2, paragraphs 6 and 8; d in the Corporation Tax (Northern Ireland) Act 2015, in Schedule 2, paragraph 3. 3 The amendments made
SI1998/3081 regulation 5(3) specifies what constitutes non-local source income: distributions from companies outside the controlled foreign company’s territory of residence, gross income and gains on loans or deposits with persons outside that territory of residence or from permanent establishments or agencies outside the territory of residence notwithstanding that the head office is in the same territory of residence as the controlled foreign company, the gross income and gains received in rela
The controlled foreign companies’ rules provide a number of general exemptions. Where none of these are available these rules provide an additional mechanism for excluding profits from apportionment to a UK company. The rules can apply in relation to any controlled foreign company that has individuals working for it in a business establishment in another EEA state. If the controlled foreign company’s profits would otherwise have to be apportioned, the UK owners of the controlled foreign company
Where an overseas company falls within the definition of a controlled foreign company at ICTA/S747(1) and none of the exemptions at ICTA88/S748 applies United Kingdom interests must apportion the chargeable profits and creditable tax of the company among the persons with an interest in it. Where Chapter IV applies for an accounting period of a controlled foreign company, the chargeable profits (INTM255620) and creditable tax (INTM255830) of the company are apportioned among the persons (whether
Where a dividend representing the apportioned chargeable profits of a controlled foreign company is charged to tax in the hands of a United Kingdom resident recipient, the same profits are effectively exposed to double taxation. The provisions of ICTA88/SCH26/PARA4 to 6 are designed to relieve such double taxation by giving relief for the tax charged under Chapter IV against the tax charged on the dividend. The main elements of the relieving provisions are as follows: Tax paid under Chapter IV i
The purpose of the relevant interest rules is to ascertain who is subject to an apportionment of profits in a controlled foreign company. Any United Kingdom resident company with a relevant interest will, subject to exemptions, have to self assess the tax arising on an apportionment to them. Not everyone with an interest in a controlled foreign company has a relevant interest. For example, if two UK companies have an interest in a controlled foreign company because one holds the shares directly
Non-resident companies controlled by UK persons are exempt from the CFC rules if they pursue an acceptable distribution policy (‘ADP’). This means they must pay at least 90% of their net chargeable profits as a dividend (‘an ADP dividend’) to the UK. For dividends paid into the UK before 31 March 2001 no distinction was made between ordinary dividends and those paid to satisfy an acceptable distribution policy for a Controlled Foreign Company (an ‘ADP dividend’). If the latter was paid through a
Where in any accounting period a company is a ‘controlled foreign company’ the provisions of Chapter IV apply in relation to that accounting period. A company is a ‘controlled foreign company’ if it is - resident outside the United Kingdom, controlled by persons resident in the United Kingdom, and subject to a lower level of taxation in its territory of residence. There is no definition of ‘company’ in Chapter IV, so the definition at CTA2010/S1121 applies. A company is any body corporate or uni
Part 2 Charge to corporation tax: basic provisions CHAPTER 3A UK RESIDENT COMPANIES: PROFITS OF FOREIGN PERMANENT ESTABLISHMENTS Anti-diversion rule Exemptions from anti-diversion rule 18I 1 The exemptions referred to in section 18G(1)(c) are the exemptions set out in Chapters 11 to 14 of Part 9A of TIOPA 2010 (controlled foreign companies: exemptions from the CFC charge). 2 In applying those Chapters for the purposes of section 18G(1)(c)— a references to section 371BA(2)(b) of TIOPA 2010 are to
any of the exemptions available in the controlled foreign companies’ rules (though, as described, some would be). {#IDAZC41B} Example 1a: Locating work in another EEA state - Operations Example 1b: Locating work in another EEA state: Intra-Group Services Example 2: Diverting profits to a controlled foreign company using intra-group loans Example 3a: Diverting profits to a controlled foreign company by locating intellectual property in the controlled foreign company Example 3b: Diverting profits