ACCA Advanced Taxation (ATX) Practice Exam

What defines a Controlled Foreign Company (CFC)?

1. A company controlling UK businesses

2. A UK company controlled by overseas owners

3. A non-UK company diverted profits to the UK

4. A non-UK company controlled by UK residents that diverts profits

The correct answer is: A non-UK company controlled by UK residents that diverts profits

A Controlled Foreign Company (CFC) is specifically defined by the relationship between its control and the residency of its shareholders, particularly concerning UK tax law. A CFC is a non-UK company that is controlled by UK residents. This control typically means that the UK residents own a certain percentage of the company's shares, allowing them to dictate the company's operations. The taxation aspect comes into play when assessing whether the non-UK company is diverting profits away from the UK. The UK tax authorities may impose rules to ensure that UK residents do not shelter income in foreign entities to avoid tax liabilities in the UK. Therefore, the focus on control by UK residents and the potential diversion of profits to the UK aligns with the purpose of CFC regulations, which aim to discourage tax avoidance through offshore structures. With this understanding, the other options do not meet the criteria for defining a Controlled Foreign Company as accurately. For instance, a non-UK company controlled by overseas owners does not pertain to UK tax regulations, and a company focusing solely on controlling UK businesses does not categorize it as a CFC. Thus, the correct definition encapsulates the critical elements of control and the nature of the profit distribution relevant to UK tax implications.