ACCA Advanced Taxation (ATX) Practice Exam

What charge is imposed under CFC rules?

1. Rental tax on properties

2. Capital gains tax on asset sales

3. Corporation tax on chargeable profits

4. Income tax on repatriated profits

The correct answer is: Corporation tax on chargeable profits

Under Controlled Foreign Corporation (CFC) rules, the primary charge imposed is corporation tax on the chargeable profits of foreign subsidiaries that are controlled by a resident taxpayer. The rationale behind CFC rules is to prevent tax avoidance via profit shifting to low-tax jurisdictions. When a domestic company controls a foreign subsidiary, the CFC rules may attribute certain amounts of the subsidiary's profits to the domestic company, thus subjecting those profits to taxation in the domestic jurisdiction. This ensures that domestic companies cannot simply shift their profits abroad to avoid paying higher rates of corporation tax at home. The measure is designed to maintain fairness in the tax system and to ensure that profits are taxed where economic activity occurs, rather than allowing them to go untaxed in foreign jurisdictions. Other options like rental tax on properties, capital gains tax on asset sales, and income tax on repatriated profits do not align with the specific mechanism and purpose of CFC rules, as they relate to different aspects of taxation rather than the taxation of profits within controlled foreign corporations.