SolvedINTM225900 | Controlled Foreign Companies: Entity Exemptions: Chapter 13 - The Low Profit Margin Exemption: Example
From HM Revenue & Customs · International Manual
A CFC’s accounting profits for 2014 show
| - | Amount | Amount |
|---|---|---|
| Sales | - | 3,245,000 |
| Cost of goods sold | (2,545,000) | - |
| Distribution | (55,000) | - |
| Administration | (400,000) | - |
| Operating Expenditure | - | (3,000,000) / 245,000 |
| Interest income | - | 5,000 |
| Interest expense | - | (150,000) |
| Accounting profit | - | 100,000 |
The cost of goods sold includes 400,000 for goods never delivered into the CFC’s territory of residence. Administration includes a 200,000 charge for services provided by staff of the CFCs parent company.
Applying the rules of the low profit margin exemption the analysis is as follows:
| - | - | Amount | Amount |
|---|---|---|---|
| - | Operating expenditure | 3,000,000 | - |
| less | Goods not used in territory | (400,000) | - |
| less | Expense representing income of related person (parent company) | (200,000) | - |
| - | Relevant operating expenditure | - | 2,400,000 |
10 per cent of relevant operating expenditure is therefore 240,000.
| - | - | Amount |
|---|---|---|
| - | Accounting profit | 100,000 |
| Add | Interest expense | 150,000 |
| - | Accounting profit before interest deductions | 250,000 |
The accounting profit before interest is 250,000, which is more than 240,000, so the low profit margin exemption does not apply.