ACCA Advanced Taxation (ATX) Practice Exam

What is the primary purpose of the CFC rules?

1. To reduce tax liabilities for UK companies abroad

2. To charge UK companies on overseas profits

3. To promote business expansion outside the UK

4. To exempt overseas subsidiaries from UK tax

The correct answer is: To charge UK companies on overseas profits

The primary purpose of the Controlled Foreign Company (CFC) rules is to charge UK companies on overseas profits. These rules aim to prevent UK companies from artificially shifting profits to low or no-tax jurisdictions. By ensuring that income generated from foreign subsidiaries is subject to UK tax under specific circumstances, CFC rules help to maintain the integrity of the UK tax system. The CFC rules apply when a UK resident company controls a foreign company that has profits, and those profits are not being taxed at an appropriate level in the foreign jurisdiction. This system is designed to discourage tax avoidance strategies that exploit differences in international tax rates. Therefore, when a UK company has significant control over an overseas subsidiary that is not paying adequate tax, the profits of that subsidiary may be subject to UK taxation as a means to ensure that UK tax obligations are met. Other options, while they might relate to international operations of UK companies, do not accurately capture the core primary purpose of the CFC rules. For example, reducing tax liabilities for UK companies, promoting business expansion outside the UK, or exempting overseas subsidiaries from UK tax misinterpret the essence of CFC regulations, which focus primarily on ensuring that foreign profits are subject to UK tax under certain conditions.