Taxation (International and Other Provisions) Act 2010 section 371FA

The basic rule

Section 371FA sets out the basic rule for determining which of a controlled foreign company's trading finance profits fall within the CFC charge gateway, by testing whether the CFC has been over-capitalised using UK-connected funding.

• A three-step process determines whether a CFC has excess free capital (or, for insurers, excess free assets) compared to what it would hold if it were a standalone company rather than a 51% subsidiary.
• Any excess is capped at the amount that derives, directly or indirectly, from UK connected capital contributions — so only the UK-sourced element of over-capitalisation is caught.
• If excess free capital or excess free assets exist, the trading finance profits reasonably attributable to investing or otherwise using those excess amounts are brought within the CFC charge.
• For insurance CFCs, the free assets figure is reduced where the CFC holds additional assets solely to meet regulatory requirements arising from guarantees given to connected insurance companies.