Understanding UK Anti Tax Avoidance Rules: Overview & Compatibility with the OECD Model

Controlled foreign company (CFC) regimes are now a familiar feature of modern tax systems, and the UK’s anti tax avoidance rules are a representative example. Below we set out (i) why such legislation exists, (ii) how the UK rules work in practice, and (iii) whether, in our view, those rules can co-exist with the principles embedded in the OECD Model Tax Convention on Income and on Capital (“the OECD Model”).

1. Why do anti tax avoidance rules exist in the UK?

1.1 Curtailing base-erosion by deferral

Historically, a UK parent could allow profits of a low-taxed subsidiary to accumulate offshore and defer UK corporation tax until the profits were repatriated as a dividend. The core rationale of the UK’s anti tax avoidance rules is therefore to prevent such deferral practices — specifically, to stop UK-resident groups from artificially diverting mobile, mainly passive, income to low-tax jurisdictions.

1.2 Aligning with BEPS Action 3

The OECD’s BEPS (Base Erosion and Profit Shifting) Action 3 recommended that member states adopt robust anti tax avoidance rules targeting (i) control, (ii) passive income, and (iii) low effective tax rates. The UK regime implements this framework and thus reinforces international co-operation rather than pursuing unilateral, protectionist measures.

2. How the UK’s anti tax avoidance rules operate

2.1 The basic charging mechanism

Where a non-UK company is at least 25% controlled by UK residents, and the subsidiary’s “chargeable profits” are taxed overseas at less than 75% of the corresponding UK rate, part or all of those profits may be apportioned and taxed on the UK shareholder. The UK corporate shareholder is entitled to a credit for any foreign tax actually paid.

2.2 Identifying “chargeable profits”

Only specific categories of income trigger a charge — broadly:
• Non-trading finance profits
• Captive insurance profits
• Profits arising from “artificial” UK activities
• UK property finance income

Exemptions — including the “low profits, low profit margin” and “excluded territories” tests — are designed to filter out ordinary commercial operations.

2.3 Interaction with the UK’s dividend exemption

Because most foreign-source dividends are already exempt in the UK, the anti tax avoidance regime is targeted — it does not apply automatically to all unrepatriated earnings, only to those bearing signs of tax avoidance. As a result, genuine, fully-taxed business profits typically fall outside the scope.

2.4 Anti-double-tax mechanisms

In line with BEPS Action 3 guidance, the UK’s anti tax avoidance rules include:
• A credit for underlying foreign tax
• Exemptions where profits will be taxed on repatriation
• Relief for previously taxed income on disposal of the subsidiary

These mechanisms minimise the risk of economic double taxation — a key test of compatibility under the OECD Model (see Part 3 below).

3. Compatibility of UK anti tax avoidance rules with the OECD Model

3.1 Source vs. residence taxation

Article 7 of the OECD Model assigns taxing rights over business profits to the state of the permanent establishment. However, the UK’s anti tax avoidance rules do not tax the foreign company — they tax the UK resident shareholder on an attributed share. As such, there is no breach of Article 7, since the UK is exercising its right to tax residents’ worldwide income (Article 1).

3.2 Avoiding treaty override

OECD Commentary (Art. 1, para 81) expressly acknowledges that states may adopt anti tax avoidance measures — including CFC-style rules — to protect their tax base, provided foreign tax relief is available. The UK complies by offering credits for underlying tax and excluding high-taxed subsidiaries entirely.

3.3 Non-discrimination

Article 24 prohibits discriminatory taxation of foreign enterprises. However, the UK’s anti tax avoidance rules apply only to UK shareholders — no tax is imposed on the foreign entity itself. Thus, no foreign enterprise is disadvantaged relative to a domestic one.

3.4 Prevention of double taxation

The OECD Model promotes the elimination of double taxation (Articles 23 A/B). Because the UK provides credit relief and because the charge falls on income that would otherwise go untaxed in the UK, the risk of juridical double taxation is largely mitigated.

Conclusion on compatibility: When properly applied, the UK’s anti tax avoidance rules align with both the structure and spirit of the OECD Model. They target artificial profit-shifting while preserving tax credit relief and do not seek to reallocate taxing rights established by treaty.

4. A brief comparison: EU ATAD & US GILTI

The UK revised its anti tax avoidance rules in 2012, with additional adjustments following the Cadbury Schweppes decision and the EU’s 2016 ATAD directive. Meanwhile, the US introduced its GILTI (Global Intangible Low-Taxed Income) regime in 2017:

Feature	UK anti tax avoidance rules	US GILTI rules
Low-tax threshold	< 75% of UK rate	Effective tax < 13.125%
Safe-harbours	Low-profits, excluded territories	10% return on net tangible assets
Effective tax after relief	Up to 25% (UK CT rate)	13.125% (after 50% deduction + FTC)
Compatibility with OECD	Affirmed by Commentary	More contentious due to formulaic scope

This comparison highlights the shared goal: tackling global base erosion through anti tax avoidance frameworks — even if technical implementation varies.

5. Practical takeaways for UK groups

1. Map control thresholds: Even a minority UK stake can trigger the rules if combined with other UK holdings.
2. Review effective tax rates: Subsidiaries operating in jurisdictions below ~19% headline rate may be caught.
3. Document commercial substance: Strong transfer pricing and management control records support exemptions.
4. Monitor finance structures: Intra-group lending to low-tax entities often triggers scrutiny.
5. Review regularly: Shifts in UK or foreign tax rates — or BEPS Pillar Two — can quickly alter exposure.

To explore planning strategies, visit our International Tax & Transfer Pricing services ↗︎.

Final thoughts

The UK’s anti tax avoidance rules are not a blunt instrument. They deter artificial diversion of passive income while respecting treaty frameworks. Through clear exemptions, tax credits and targeted scope, the regime balances protecting the UK tax base with maintaining compliance with OECD principles.

For businesses with overseas subsidiaries, periodic review is essential — not just to reduce exposure, but to stay aligned with global standards on fair and transparent taxation.