HMRC Reporting for Indian Subsidiary: CFC Rules & TP

Why HMRC Scrutinises Indian Subsidiaries

India's concessional corporate regime carries a 22% base rate — 25.17% effective once the 10% surcharge and 4% health-and-education cess are added — under section 200 read with section 205(1) of the Income-tax Act, 2025 (section 115BAA of the Income-tax Act, 1961). That sits just above the UK's 25% main corporation tax rate, which is why a plain-vanilla Indian trading subsidiary is usually not the problem. The problem is what India layers on top: incentive regimes for SEZ units, start-ups, and new manufacturing can pull a subsidiary's effective rate a long way below the headline, and that is what puts a UK group into Controlled Foreign Company (CFC) territory.

For a UK parent company, getting HMRC reporting wrong on an Indian subsidiary can result in the subsidiary's profits being taxed again in the UK — effectively eliminating the tax efficiency of the India structure. This guide covers the three pillars of HMRC reporting for Indian subsidiaries: CFC rules, transfer pricing, and Country-by-Country Reporting.

Understanding the UK CFC Regime

The UK CFC rules, contained in Part 9A of the Taxation (International and Other Provisions) Act 2010 (TIOPA), are designed to tax profits that have been artificially diverted from the UK to a controlled foreign entity. A CFC is any non-UK resident company that is controlled by UK residents. For most UK companies with Indian subsidiaries, the Indian entity will meet the definition of a CFC — it is non-UK resident and controlled (directly or indirectly) by the UK parent.

The CFC Charge Gateway

Not all CFC profits are taxable in the UK. Chapter 3 of Part 9A TIOPA is the gateway itself: it determines which, if any, of Chapters 4 to 8 applies to the CFC's profits. Those five chapters are:

• Chapter 4: Profits attributable to UK activities — catches profits where UK-based significant people functions or assets have been instrumental in generating the CFC's income
• Chapter 5: Non-trading finance profits — targets passive income such as interest and investment returns
• Chapter 6: Trading finance profits — finance profits of a CFC carrying on a financial trade, where the funding derives from UK connected capital
• Chapter 7: Captive insurance business — specific to insurance arrangements
• Chapter 8: Solo consolidation — narrow, applying to a CFC that is a solo consolidation waiver subsidiary of a UK bank

Chapter 9 is not a gateway — it is a relief. It gives the partial (75%) or full exemption for profits from qualifying loan relationships that groups know as the finance company exemption, and it is claimed rather than triggered.

If profits pass through the gateway, a CFC charge is imposed on the UK parent at the prevailing UK corporation tax rate of 25%. The charge is apportioned to UK "chargeable companies" that hold at least a 25% interest in the CFC.

CFC Exemptions: How to Avoid the Charge

Before any CFC charge applies, Chapters 10 to 14 of Part 9A give five entity-level exemptions. If any one applies, the entire CFC is outside the charge for that accounting period. For Indian subsidiaries, these are the exemptions that matter:

1. Exempt Period (Chapter 10)

A 12-month exemption applies when a company first becomes a CFC — for example, when a UK company acquires an existing Indian business. This gives the UK parent time to restructure without immediate CFC exposure.

2. Excluded Territories Exemption (Chapter 11)

India is an excluded territory. It appears in Part 1 of the Schedule to the Controlled Foreign Companies (Excluded Territories) Regulations 2012, on a long list of other jurisdictions. For many UK groups this is the cleanest route out of the CFC regime, and it is routinely overlooked.

Being on the list is necessary but not sufficient. The exemption also requires that the CFC is resident in that territory for the whole accounting period, that its income falling within the specified categories does not exceed the relevant threshold, that the IP condition is met, and that the CFC is not part of an arrangement with a main purpose of reducing UK tax. Note too that India is not one of the six territories (Australia, Canada, France, Germany, Japan and the USA) for which regulation 4 substitutes a simplified requirement — so the standard Chapter 11 conditions apply in full, and each has to be tested and documented.

3. Low Profits Exemption (Chapter 12)

If the Indian subsidiary's accounting profits are less than GBP 50,000, or less than GBP 500,000 where non-trading income does not exceed GBP 50,000, the CFC charge does not apply. This is relevant for early-stage Indian subsidiaries that are still building revenue.

4. Low Profit Margin Exemption (Chapter 13)

If the Indian subsidiary's accounting profits are less than 10% of its operating expenditure, the exemption applies. This typically covers Indian subsidiaries that operate as cost-plus service centres — for example, an Indian IT development centre that charges the UK parent on a cost-plus basis with a margin below 10%.

5. Tax Exemption (Chapter 14 — the 75% test)

This is the most important exemption for Indian subsidiaries. If the Indian subsidiary pays local tax equivalent to at least 75% of what would have been payable had the same profits been taxed in the UK, no CFC charge arises. With the UK main rate at 25%, the threshold is an effective Indian tax rate of 18.75% (75% of 25%).

India's effective corporate tax rate under the concessional regime is 25.17% (22% plus surcharge and cess), which comfortably exceeds the 18.75% threshold. However, if the Indian subsidiary benefits from tax holidays — the SEZ deduction under section 10AA of the Income-tax Act, 1961, preserved for existing units by section 144 of the Income-tax Act, 2025, or the start-up deduction under section 140 of the Income-tax Act, 2025 (section 80-IAC of the 1961 Act) — the effective rate may fall below 18.75%, disqualifying the exemption and triggering a CFC charge. Note that the SEZ deduction is closed to new units: it matters only for subsidiaries that entered it before the sunset and are still inside their eligible years.

Practical Tax Rate Comparison

UK parent companies with Indian subsidiaries in SEZs or claiming start-up deductions must conduct an annual CFC assessment for each period. Failing the tax exemption is not the end of the analysis, though — the excluded territories exemption above, or the low profits and low profit margin exemptions, may still take the subsidiary out of the charge, and even if no entity-level exemption applies, a charge only arises if profits actually pass the Chapter 3 gateway.

Transfer Pricing: UK-Side Obligations

Transfer pricing is a dual-jurisdiction obligation. While India imposes its own TP documentation requirements — the accountant's report in Form No. 48 (formerly Form 3CEB), benchmarking studies, and contemporaneous documentation under rule 84 of the Income-tax Rules, 2026, kept under section 171 of the Income-tax Act, 2025 (section 92D of the Income-tax Act, 1961), the UK parent also has distinct HMRC obligations. These are not duplicative — they serve different purposes and follow different rules.

On the Indian form itself: for tax year 2026-27 onwards the accountant's report under section 172 of the Income-tax Act, 2025 is Form No. 48 (rule 85 of the Income-tax Rules, 2026), and rule 85(2) requires it to be furnished at least one month before the due date for furnishing the return of income under section 263(1)(c). For FY 2025-26 and earlier years the report was Form 3CEB under Rule 10E of the Income-tax Rules, 1962, furnished under section 92E of the Income-tax Act, 1961. Which of the two a filing made after 1 April 2026 in respect of FY 2025-26 must use is not settled by the notified rules — the Income-tax Rules, 2026 contain no repeal-and-savings provision. Check the form actually enabled on the e-filing portal before filing, and take professional advice.

UK Transfer Pricing Framework

The UK's TP rules follow the OECD Transfer Pricing Guidelines. All transactions between the UK parent and the Indian subsidiary must be priced at arm's length. HMRC can make adjustments if it determines that the pricing has reduced UK taxable profits. The Transfer Pricing Records Regulations 2023 (effective for accounting periods commencing on or after 1 April 2023) impose mandatory documentation requirements for "very large" businesses — defined as worldwide groups with consolidated turnover exceeding EUR 750 million.

Documentation Requirements

For groups above the EUR 750 million threshold:

• Master File — group-wide overview including organisational structure, business description, intangibles, intercompany financial activities, and consolidated financial and tax positions
• Local File — UK-specific documentation covering the economic characteristics of related-party transactions, amounts involved, and the transfer pricing analysis demonstrating arm's length pricing for each class of transactions
• Country-by-Country Report (CbCR) — filed annually, reporting revenues, profits, taxes paid, employees, and assets by jurisdiction

HMRC can request the Master File and Local File, and the taxpayer must provide them within 30 days. Failure to maintain adequate documentation can result in penalties and adverse inferences during an audit.

For Groups Below the Threshold

Smaller UK-India groups are not required to prepare formal Master File and Local File documentation. However, they must still ensure arm's length pricing and be prepared to demonstrate compliance if HMRC enquires. In practice, maintaining a transfer pricing policy document and periodic benchmarking study is strongly recommended.

Common UK-India Transfer Pricing Transactions

For detailed guidance on Indian-side transfer pricing obligations, see our article on transfer pricing basics for foreign subsidiaries.

Country-by-Country Reporting (CbCR)

UK-headquartered groups with consolidated revenues of EUR 750 million or more must file a CbCR with HMRC within 12 months of the end of the reporting period. The CbCR includes aggregate data for each jurisdiction where the group operates, covering revenue (related and unrelated party), profit before tax, income tax paid (cash basis), income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets.

For groups below the EUR 750 million threshold, CbCR is not mandatory but voluntary filing is accepted. Even if not required to file CbCR, UK companies with Indian subsidiaries should be aware that Indian tax authorities actively use CbCR data exchanged through the Multilateral Competent Authority Agreement (MCAA) to identify transfer pricing audit targets.

CbCR Filing Deadlines

Interplay Between UK and Indian Tax Reporting

The UK-India DTAA provides mechanisms to avoid double taxation, but the interaction between UK CFC charges and Indian corporate tax creates complex scenarios that require careful planning.

Double Tax Relief on CFC Charges

If a CFC charge is imposed on the UK parent, double tax relief is available for the Indian tax already paid by the subsidiary. The relief is calculated as the lower of the Indian tax actually paid and the UK tax on the same profits. In most cases, where the Indian effective rate (25.17%) matches or exceeds the UK rate (25%), full relief is available — but the administrative cost of claiming it is significant, involving detailed profit attribution across jurisdictions.

Dividend Exemption

Dividends received by a UK company from its Indian subsidiary are exempt from UK corporation tax under Part 9A of CTA 2009 (the dividend exemption regime), provided they fall within one of the exempt classes. Most trading dividends from an Indian subsidiary will qualify. However, dividends paid by the Indian subsidiary are subject to Indian withholding tax at 10% under Article 11(2)(b) of the UK-India Convention, against a 20% domestic rate for a non-resident company under section 207(1) (Table, Sl. Nos. 1-3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). The reduced rate requires the beneficial owner to be a UK resident, and in practice a Tax Residency Certificate and Form 41 (formerly Form 10F).

Avoiding Double TP Adjustments

A common problem for UK-India groups is simultaneous transfer pricing adjustments by both HMRC and the Indian tax authorities. If HMRC increases the UK parent's taxable profits (by reducing the service fee deduction from the Indian subsidiary) and India simultaneously increases the Indian subsidiary's taxable profits (by reducing the same service fee income), the group is taxed twice on the same income. Resolution options include:

• Mutual Agreement Procedure (MAP) — under Article 27 of the UK-India Convention (Article 26 is non-discrimination), the competent authorities of both countries can negotiate to eliminate double taxation. MAP cases commonly take a couple of years or more to resolve.
• Advance Pricing Agreement (APA) — a bilateral APA between UK and India tax authorities can pre-agree transfer pricing methodologies. India's programme is at scale: CBDT signed a record 219 APAs in FY 2025-26, taking the cumulative total to 1,034 since inception — 750 unilateral and 284 bilateral (CBDT press release, 31 March 2026). The UK's APA process is managed by HMRC's Transfer Pricing Team.

For guidance on India-side TP compliance, see annual transfer pricing documentation and 7 transfer pricing mistakes that trigger a tax audit.

Filing Obligations: UK Parent Checklist

A UK company with an Indian subsidiary must meet these HMRC reporting obligations:

Corporation Tax Return (CT600)

The CT600 must disclose the existence of CFCs and include any CFC charge in the UK parent's tax computation. The relevant supplementary page is CT600B — Controlled Foreign Companies and foreign permanent establishment exemptions, not CT600E (which is the charities page).

Funding the Indian Subsidiary

There is no separate UK filing that captures an equity injection into, or a loan to, an Indian subsidiary as such. (The old reporting requirement for international movements of capital has been repealed, and the Annual Tax on Enveloped Dwellings is an unrelated charge on UK residential property held by companies.) What matters instead is that the funding is reflected correctly in the accounts and the CT600 computation, and that any intercompany loan carries an arm's-length interest rate — an underpriced or overpriced loan is a transfer pricing issue, and an equity-like loan can raise questions under the loan relationship and corporate interest restriction rules.

Transfer Pricing Self-Assessment

UK companies must self-assess transfer pricing on the CT600. If HMRC later determines that the self-assessment was incorrect, penalties apply: up to 30% of the additional tax for careless errors and up to 100% for deliberate understatement.

Annual Compliance Calendar for UK Parent

For help with FEMA compliance on the Indian side, including FC-GPR filings and FLA returns, see our FEMA/RBI compliance service.

Key Takeaways

• Most Indian subsidiaries paying standard corporate tax (25.17%) will pass the CFC 75% test — but subsidiaries in SEZs or claiming start-up deductions may fall below the 18.75% threshold. Test the excluded territories exemption too: India is on the excluded territories list, and that route is frequently missed
• Transfer pricing documentation is now mandatory for large UK groups — the 2023 Regulations require Master File and Local File for groups above EUR 750 million turnover, deliverable to HMRC within 30 days of request
• CbCR data is actively exchanged between UK and India — Indian tax authorities use this data to identify TP audit targets, making consistency between UK and Indian filings essential
• Double TP adjustments are a real risk — use MAP or bilateral APAs to pre-empt simultaneous adjustments by HMRC and Indian authorities
• Annual CFC assessment is non-negotiable — even if the Indian subsidiary passed the 75% test last year, changes in tax incentives, deductions, or profit mix can alter the result. Work through the five entity-level exemptions in Chapters 10-14 before touching the Chapter 3 gateway

For a complete overview of India-UK bilateral tax planning, see our article on the India-UK CETA and its impact on British businesses. Our transfer pricing service covers both UK and Indian documentation requirements for cross-border groups.