Aqua Inc is a company registered and incorporated in the Republic of Emlynia. Its shares are held as follows:
Beige Ltd UK resident 5,000
Sky Ltd UK resident 400
Salmon Weynes (a private individual) UK resident 3,000
Diamond SA (a French company) resident in France 3,600
Total: 12,000
All directors of Aqua Inc are resident in Emlynia and all strategic decisions of the company are taken there. The company will be considered tax resident in Emlynia.
(i) Is Aqua Inc controlled by UK tax residents? If yes, who would be liable to a CFC charge under UK legislation? [5 marks]
Aqua Inc’s accounts reveal the following:
Trading profits 6,000
Interest received 2,500
Capital gain
The correct answer and explanation is :
Answer:
(i) Is Aqua Inc controlled by UK tax residents?
Yes, Aqua Inc is controlled by UK tax residents.
To determine control for UK Controlled Foreign Company (CFC) purposes, we apply UK Corporation Tax rules under Part 9A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). A foreign company is considered a CFC if it is controlled by UK residents.
Control is broadly defined in this context and includes:
- Legal control – more than 50% of share capital or voting rights held by UK residents;
- Economic control – UK residents entitled to more than 50% of profits or assets on a winding up;
- Accounting control – the UK person is required to consolidate the foreign entity in its financial statements.
Shareholding Analysis:
| Shareholder | Residency | Shares | % Ownership |
|---|---|---|---|
| Beige Ltd | UK | 5,000 | 41.67% |
| Sky Ltd | UK | 400 | 3.33% |
| Salmon Weynes | UK | 3,000 | 25.00% |
| UK Residents Total | 8,400 | 70.00% | |
| Diamond SA | France | 3,600 | 30.00% |
Conclusion on Control:
UK residents hold 70% of the shares and thus meet the control threshold. Therefore, Aqua Inc is controlled by UK residents for CFC purposes.
Who is liable to a CFC charge?
A CFC charge under UK tax law is only levied on UK resident companies that have a 25% or greater interest in the CFC.
Thus, liability for the CFC charge lies with:
- Beige Ltd: 5,000/12,000 = 41.67% → liable
- Sky Ltd: 400/12,000 = 3.33% → not liable
- Salmon Weynes: An individual → individuals are not subject to the CFC charge.
Final Answer:
- Aqua Inc is controlled by UK tax residents.
- Beige Ltd is liable to a CFC charge under UK legislation as it holds more than 25% of the company.
- Sky Ltd and Salmon Weynes are not liable to the CFC charge.