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Cross-Border Corporate and Personal TaxationCorporation TaxOverseas DividendsControlled Foreign CompaniesStatutory Residence Test

ACCA · Question 03 · Cross-Border Corporate and Personal Taxation

SECTION B - ADVISORY REPORT

You are a tax consultant advising Med-Tech Solutions Ltd, a UK-resident company that manufactures specialized surgical equipment.

On 1 May 2024, Med-Tech Solutions Ltd acquired 100% of the ordinary share capital of Bio-Scan GmbH, a company resident in Germany. Bio-Scan GmbH manufactures complementary diagnostic devices. The German corporate tax rate is 15%. Bio-Scan GmbH is expected to generate profits of £1.2 million in the year ending 30 April 2025 and plans to pay a dividend of £500,000 to Med-Tech Solutions Ltd on that date.

To oversee the integration, Med-Tech Solutions Ltd has seconded one of its senior executives, Sarah, to Bio-Scan GmbH. Sarah moved to Germany on 1 July 2024. She signed a 3-year full-time employment contract to work exclusively in Germany. Prior to this, Sarah had lived in the UK her entire life. She retained her UK home, which is currently empty, but she has leased an apartment in Munich. She expects to return to the UK for 20 days during the 2024/25 tax year to visit family, taking no work days during these visits.

REQUIREMENT:
Prepare a report for the directors of Med-Tech Solutions Ltd and Sarah that:
(a) Advises Med-Tech Solutions Ltd on the UK corporation tax implications of receiving the dividend from Bio-Scan GmbH, and evaluates whether the Controlled Foreign Company (CFC) rules will apply to Bio-Scan GmbH's profits. (15 marks)
(b) Advises Sarah on her UK Statutory Residence status for the 2024/25 tax year, including the availability of split-year treatment, and explains how her employment income earned in Germany will be treated for UK income tax purposes. (10 marks)

How to approach this question

For Part A, state the general rule for overseas dividends (exempt) and explain why. Then define a CFC, apply the definition to the scenario, and systematically evaluate the CFC exemptions (specifically ETE, Tax Exemption, and Motive Test) using the data provided. For Part B, apply the Statutory Residence Test step-by-step. Check the automatic overseas tests first (focusing on full-time work overseas). Then explain split-year treatment Case 1, and conclude on the taxability of her German salary.

Full Answer

This question covers cross-border corporate and personal taxation. Overseas dividends received by UK companies are generally exempt, meaning DTR is irrelevant. The CFC rules are a major part of ATX; students must know the exemptions. Here, the local tax rate (15%) is too low to meet the Tax Exemption (which requires 75% of the UK's 25% rate, i.e., 18.75%), but the Excluded Territories Exemption or Motive Test will save the company from a charge. For the individual, leaving the UK to work full-time abroad triggers Case 1 split-year treatment, protecting foreign earnings from UK tax.

Common mistakes

A frequent error is calculating Double Taxation Relief on the dividend; students forget that dividends are almost always exempt. Another mistake is assuming the CFC 'Tax Exemption' applies just because some tax is paid; it must be mathematically proven (75% of UK rate). For residence, students often jump straight to the 'Sufficient Ties Test' without checking the 'Automatic Overseas Tests' first.
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