ACCA Advanced Taxation (ATX) Practice Exam

Which circumstance would NOT prevent a CFC charge?

1. An exemption applies

2. No chargeable profits of CFC

3. The shareholder is a corporate entity

4. The shareholder is an individual

The correct answer is: The shareholder is a corporate entity

A charge on a Controlled Foreign Company (CFC) can occur under specific conditions, particularly if the company's profits are deemed chargeable. The scenario where a shareholder is a corporate entity does not inherently prevent a CFC charge because the rules governing CFCs apply regardless of whether the shareholder is an individual or a corporate entity. In this context, both corporate and individual shareholders could face CFC charges depending on the circumstances surrounding profit distribution and tax treaties. An exemption may prevent a CFC charge, as would the absence of chargeable profits. If the CFC does not generate any profits that are subject to taxation, the CFC rules would not apply. In contrast, while the status of the shareholder can influence the tax outcome, merely being a corporate entity does not mean that a CFC charge is avoided. Thus, the presence of an individual shareholder does not eliminate the potential for a charge, similar to how a corporate entity would not do so. The nuances in tax law focus heavily on the nature of the profits and the specific exemptions in play rather than solely the identity of the shareholder.