ACCA Advanced Taxation (ATX) Practice Exam

Which of the following would NOT be considered a low profit margin exemption for CFC?

1. Profits not exceeding 10% of operating expenditure

2. Higher than 10% profit margin

3. Relevant operating expenditure

4. Non-trading profits limitation

The correct answer is: Higher than 10% profit margin

The answer indicating that a higher than 10% profit margin would not be considered a low profit margin exemption for Controlled Foreign Companies (CFCs) is correct because it directly contradicts the criteria defining what constitutes a low profit margin exemption. Low profit margin exemptions are designed to allow CFCs that demonstrate a minimal level of profitability – typically defined as profits not exceeding a certain percentage of operating expenditure – to avoid certain tax implications. A profit margin higher than 10% suggests that the CFC is producing a significant profit relative to its operating expenses, which would typically disqualify it from this exemption. Thus, it does not fit the criteria meant to categorize a CFC with low profits. The other options are aligned with the concept of low profit margin exemptions. For instance, profits not exceeding a specific threshold of operating expenditure or the relevant operating expenditure itself directly relate to defining profitability criteria in this context. Non-trading profits limitation also refers to the idea that only trading profits are considered for these calculations, emphasizing the need for a clear distinction between types of income when assessing eligibility for exemptions under CFC rules.