ACCA Advanced Taxation (ATX) Practice Exam

What is an important consideration when dealing with overseas companies and their CFC status?

1. They must have minimum capital requirements

2. They must always follow UK tax rules

3. They could be classified as a CFC

4. They are exempt from local regulations

The correct answer is: They could be classified as a CFC

An important consideration when dealing with overseas companies and their Controlled Foreign Company (CFC) status is that these companies could be classified as a CFC under certain conditions. The CFC rules are designed to prevent profit shifting to low or no tax jurisdictions and typically apply when a UK resident company has control over a foreign corporation, and that corporation derives its income from passive sources or from lower tax jurisdictions. This classification is crucial because, if the overseas company qualifies as a CFC, its income may be subject to UK taxation under the UK's CFC rules, which aim to curb tax avoidance. This could lead to UK tax liabilities for the controlling UK company, regardless of where the income is earned. The other considerations listed are less relevant to the specific context of CFC status. Minimum capital requirements are generally a matter of local company law rather than a direct factor in CFC classification. Additionally, overseas companies do not always need to follow UK tax rules, as they are subject to their local jurisdiction's regulations. Lastly, being exempt from local regulations does not relate to the CFC classification and can be misleading; they must comply with the laws of their operating country. Therefore, the possibility of classification as a CFC is the most pertinent consideration to understand the implications