Controlled Foreign Companies and the CFC Charge
Written and reviewed by the International Tax Accountants editorial team. Last reviewed 29 July 2026.
The controlled foreign companies rules are an anti-avoidance regime. They exist to stop a United Kingdom group from diverting profit into a foreign subsidiary in a low-tax jurisdiction and leaving it there untaxed by the United Kingdom. Where the rules bite, a share of the foreign company's profit is brought back into charge on its United Kingdom corporate shareholders.
The regime is in Part 9A of the Taxation (International and Other Provisions) Act 2010. It is deliberately targeted, with a series of exemptions that take most genuine commercial arrangements outside the charge, so that only diverted profit is caught.
Whether the rules bite turns on what makes a company a controlled foreign company, when a United Kingdom shareholder faces a charge, and the exemptions that most often apply. The rules interact closely with the pricing of intra-group dealings under transfer pricing, since both police profit shifted out of the United Kingdom.
What Counts as a CFC
A controlled foreign company is a company that is not resident in the United Kingdom but is controlled by persons resident in the United Kingdom. The rules look through the foreign company to ask whether United Kingdom profit has in substance been moved into it.
The purpose is narrow. The regime counters the diversion of United Kingdom profit to low-taxed jurisdictions, and it is the diverted element, not the whole of a foreign subsidiary's profit, that the charge is designed to capture.
When a UK Shareholder Faces a Charge
Where the rules apply, the charge falls on a United Kingdom resident company that holds at least a 25% interest in the controlled foreign company, under the HM Revenue and Customs guidance on the regime and section 371BD. A shareholder below that level is generally outside the charge.
The charge brings a proportionate share of the relevant profit into the United Kingdom shareholder's corporation tax. Before that stage is reached, however, the profit has to fall outside every applicable exemption, which is why the exemptions do most of the work in practice.
The Entity-Level Exemptions
The regime provides a set of entity-level exemptions that take a controlled foreign company outside the charge for a period. They are the exempt period exemption, the excluded territories exemption, the low profits exemption, the low profit margin exemption and the tax exemption.
If any one of these applies to the controlled foreign company for the relevant accounting period, there is no charge for that period and there is no need to work through the detailed profit-by-profit analysis. In practice, checking the entity-level exemptions first is the efficient way to approach a review.
The Low Profits Exemption
The low profits exemption is one of the most commonly used. It applies where the controlled foreign company's total profits for the accounting period are no more than £500,000, of which non-trading income is no more than £50,000, under section 371LB.
The exemption recognises that a small foreign subsidiary is unlikely to be a vehicle for diverting significant United Kingdom profit. Where the profit levels sit within these limits, the exemption removes the charge without a detailed analysis of the profit.