ACCA Advanced Taxation (ATX) Practice Exam

What does the CFC charge apply to?

1. Only to capital gains

2. Only to chargeable profits

3. To both chargeable profits and chargeable gains

4. To all profits earned by the company

The correct answer is: Only to chargeable profits

The CFC (Controlled Foreign Company) charge applies specifically to chargeable profits. This concept is rooted in the rules designed to prevent the erosion of the tax base in a jurisdiction where a company is controlled by residents. The primary objective of the CFC charge is to ensure that the profits generated by foreign subsidiaries, which are controlled by domestic shareholders, are taxed in the domicile of the controlling shareholders, typically at the domestic tax rate. Chargeable profits refer to the profits that are ascertainable for tax purposes, which include trading income and certain other forms of income that can be subjected to tax in the domestic jurisdiction. The definition thus focuses on profits recognized under domestic tax law rather than including capital gains or all forms of income. While capital gains are an important component of a company's income, they are not captured under the scope of the CFC charge; rather, they may have their own distinct set of rules regarding taxation. Therefore, the application of the CFC charge is restricted to those profits that are deemed chargeable within the context of domestic tax regulations, making this choice the most accurate.