A company that is:
Resident outside the UK;
Controlled by persons resident in the UK; and
Subject to a lower level of taxation in the territory in which it is resident.
Set out in Chapter IV of Part XVII of the Income and Corporation Taxes Act 1988 (www.practicallaw.com/A35377) (ICTA), the CFC rules prevent UK companies from avoiding tax in the UK by diverting income to subsidiaries (www.practicallaw.com/A37032) located in tax havens (www.practicallaw.com/A37068) or countries with preferential tax regimes. HM Revenue & Customs (www.practicallaw.com/6-200-6399) can assess a UK resident company on profits of a CFC. There are a number of exemptions. No assessment can be made if, for example, an acceptable distribution policy is pursued under which a sufficient percentage of the foreign profits is being received (and taxed) in the UK or the CFC undertakes certain exempt activities (sections 747-756, ICTA). For further detail, see Practice note, Controlled foreign companies and attribution of gains: tax (www.practicallaw.com/7-367-0989).