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

Category A income: the basic rule

Section 371KE defines the basic rules for identifying Category A income of a controlled foreign company, which focuses on income that benefits from tax exemptions, reduced tax rates linked to investment incentives, or tax repayment arrangements in the CFC's territory.

• Category A income comprises gross amounts of relevant income (before deducting expenses or reserve transfers) that fall within one of three specified categories, subject to the rules in section 371KF concerning permanent establishments in excluded territories.
• Relevant income is any income of the CFC that is either included in its accounting profits for the period or, if not included in accounting profits, nevertheless arises during that period.
• Income qualifies as Category A if it is exempt from tax in the CFC's territory, or if it is taxed at a reduced rate under a provision whose main purpose is to encourage investment in that territory (such as a tax holiday or investment incentive).
• Income also qualifies as Category A where tax is initially paid on it in the CFC's territory, but the CFC, a person with an interest in the CFC, or a connected person is entitled to a tax repayment or credit payment relating to that tax — provided the repayment is not simply a form of loss relief.