Finance (No. 4) Bill

Session 2010 - 12
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Other Bills before Parliament

Finance (No. 4) Bill

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
448

371EE
Leases to UK resident companies etc
(1)
Non-trading finance profits fall within this section so far as they arise
from a relevant finance lease in relation to which the following
condition is met.
(2)
The condition is that—
5
(a)
the lease is made by the CFC (directly or indirectly)—
(i)
with a UK resident company connected with the CFC,
or
(ii)
with a non-UK resident company connected with the
CFC for the purposes of a UK permanent
10
establishment of the non-UK resident company, and
(b)
it is reasonable to suppose—
(i)
that the lease is made as an alternative to the other
company purchasing (directly or indirectly) the asset
which is the subject of the lease, and
15
(ii)
that the main reason, or one of the main reasons, for
that is a reason relating to a liability, or potential
liability, of any person to tax or duty imposed under
the law of any territory.
Chapter 6
20
The CFC charge gateway: trading finance profits
371FA
The basic rule
(1)
Take the following steps to determine the CFC’s profits falling
within this Chapter for the purposes of step 2 in section 371BB(1) (the
CFC charge gateway).
25

This is subject to regulations under section 371FC or 371FD.

Step 1

Determine if, during the accounting period, the CFC’s free capital
exceeds what it is reasonable to suppose its free capital would be
were it a company which is not the 51% subsidiary of any other
30
company.

If there is excess free capital, “the step 1 amount” is—
(a)
the excess free capital, or
(b)
if less, the CFC’s free capital so far as deriving (directly or
indirectly) from UK connected capital contributions.
35

Step 2

This step applies only if the CFC carries on insurance business
during the accounting period; if it does not, go straight to step 3.

Determine if, during the accounting period when the CFC is carrying
on insurance business, the CFC’s free assets exceeds what it is
40
reasonable to suppose its free assets would be were it a company
which is not the 51% subsidiary of any other company.

If there is excess free assets, “the step 2 amount” is—
(a)
the excess free assets, or
(b)
if less, the CFC’s free assets so far as deriving (directly or
45
indirectly) from UK connected capital contributions.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
449


Step 3

If no excesses are determined at steps 1 and 2, no profits fall within
this Chapter.

Otherwise, the profits falling within this Chapter are the CFC’s
trading finance profits so far as it is reasonable to suppose that those
5
profits arise from the investment or other use of the step 1 amount or
the step 2 amount (or both).
(2)
For the purposes of step 1 in subsection (1) the CFC’s “free capital” is
the funding it has for its business so far as the funding does not give
rise to debits which are brought into account in determining the
10
CFC’s non-trading finance profits or trading finance profits.
(3)
For the purposes of step 2 in subsection (1) the CFC’s “free assets” is
the amount by which the value of its assets exceeds its loan capital.
(4)
Subsections (2) and (3) are subject to section 371FB and subsection (3)
is also subject to subsection (6).
15
(5)
Subsection (6) applies if—
(a)
the CFC, acting outside its insurance business, gives a
guarantee against losses of an insurance business of another
company which is connected with the CFC,
(b)
the guarantee is necessary for the purpose of meeting
20
regulatory requirements applicable to the other company’s
insurance business,
(c)
in consequence of having given the guarantee, the CFC is
required by regulatory requirements applicable to its
insurance business to hold more assets than it would
25
otherwise be required to hold, and
(d)
during the accounting period, the CFC holds assets solely for
the purpose of meeting that requirement for more assets.
(6)
The value of the assets held by the CFC as mentioned in subsection
(5)(d) is to be deducted from the CFC’s free assets.
30
(7)
For the purposes of this section the “value” of an asset is the amount
which it is reasonable to suppose the CFC would obtain for the
transfer of all the CFC’s rights in respect of the asset from a person
not connected with the CFC.
371FB
Qualifying loan relationships
35
(1)
Subsection (2) applies if, during the CFC’s accounting period—
(a)
the CFC is the ultimate debtor in relation to a qualifying loan
relationship (within the meaning of Chapter 9) of another
CFC (“the creditor CFC”), and
(b)
the CFC and the creditor CFC are connected with each other.
40
(2)
E% of the principal outstanding during the CFC’s accounting period
on the loan which is the subject of the qualifying loan relationship is
to be added to the CFC’s free capital or free assets (as the case may
be).
(3)
“E%” is given by the following formula—
45

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
450


where—
EP is the total amount of the profits of the qualifying loan
relationship which are exempt, and
P is the total amount of the profits of the qualifying loan
relationship.
5
(4)
For the purposes of subsection (3)—
(a)
references to the profits of the qualifying loan relationship
are to the profits of the qualifying loan relationship for
accounting periods of the creditor CFC which fall wholly or
partly in the CFC’s accounting period,
10
(b)
the profits of the qualifying loan relationship for an
accounting period of the creditor CFC are to be determined in
accordance with Chapter 9,
(c)
the steps in subsection (5) are to be taken to determine the
amount of the profits of the qualifying loan relationship for
15
an accounting period of the creditor CFC which are
“exempt”, and
(d)
the profits of the qualifying loan relationship for an
accounting period of the creditor CFC which falls only partly
in the CFC’s accounting period, and the amount of those
20
profits which are exempt, are to be apportioned between—
(i)
the part of the creditor CFC’s accounting period
which falls in the CFC’s accounting period, and
(ii)
the part which does not,

with only those profits, and the amount of exempt profits,
25
apportioned to the part mentioned in sub-paragraph (i) being
included in P or EP (as the case may be).
(5)
Here are the steps referred to in subsection (4)(c).

The steps are to be taken separately in relation to each chargeable
company which makes a claim under Chapter 9 in relation to the
30
creditor CFC’s accounting period.

The amount of the profits of the qualifying loan relationship for the
creditor CFC’s accounting period which are exempt is the total of the
amounts given by step 2.

Step 1
35

Determine the amount of the profits of the qualifying loan
relationship for the accounting period which, in the case of the
chargeable company, are exempt under Chapter 9.

Step 2

Multiply the amount determined at step 1 by P% (as defined in
40
section 371BC(3)).
371FC
Exclusion: banking business
(1)
The HMRC Commissioners may by regulations provide that, if
specified conditions are met, step 3 in section 371FA(1) is not to
apply in relation to the CFC’s trading finance profits so far as they
45
arise from banking business, or banking business of a specified
description, carried on by the CFC.

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
451

(2)
Regulations under subsection (1) may (in particular) make provision
by reference to—
(a)
the territory in which a CFC is resident or any territory in
which its banking business is regulated or carried on, or
(b)
the regulatory requirements imposed from time to time in
5
any territory in relation to banking business.
371FD
Exclusion: insurance business
(1)
The HMRC Commissioners may by regulations provide that, if
specified conditions are met, step 3 in section 371FA(1) is not to
apply in relation to the CFC’s trading finance profits so far as they
10
arise from insurance business, or insurance business of a specified
description, carried on by the CFC.
(2)
In subsection (1) “insurance business” does not include insurance
business so far as consisting of the effecting or carrying out of
contracts of insurance covered by section 371GA(2) (UK insurance
15
contracts), including the investment of premiums received from such
contracts.
(3)
Regulations under subsection (1) may (in particular) make provision
by reference to—
(a)
the territory in which a CFC is resident or any territory in
20
which its insurance business is regulated or carried on, or
(b)
the regulatory requirements imposed from time to time in
any territory in relation to insurance business.
Chapter 7
The CFC charge gateway: captive insurance business
25
371GA
The basic rule
(1)
The CFC’s profits falling within this Chapter for the purposes of step
2 in section 371BB(1) (the CFC charge gateway) are any amounts
included in its assumed total profits so far as they—
(a)
arise from the CFC’s insurance business,
30
(b)
fall within subsection (2), and
(c)
fall within subsection (6) where applicable.
(2)
An amount falls within this subsection if it derives (directly or
indirectly) from—
(a)
a contract of insurance which is entered into with—
35
(i)
a UK resident company connected with the CFC, or
(ii)
a non-UK resident company connected with the CFC
acting through a UK permanent establishment, or
(b)
a contract of insurance which—
(i)
is entered into with a UK resident person, and
40
(ii)
is linked (directly or indirectly) to the provision of
goods or services to the UK resident person
(excluding services provided as part of insurance
business).
(3)
Subsection (2)(a)(i) does not cover a premium paid under a contract
45
of insurance if—

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
452

(a)
the UK resident company has made an election under section
18A of CTA 2009 (exemption for profits or losses of foreign
permanent establishments), and
(b)
the premium is wholly brought into account for the purpose
of determining any exemption adjustment in relation to the
5
company under that section.
(4)
Subsection (2)(a) covers a contract of reinsurance only so far as the
original contract of insurance would fall within subsection (2)(a)
(ignoring any other contracts of reinsurance which may lie between
the original contract of insurance and the contract of reinsurance in
10
question).
(5)
Subsection (6) applies in relation to an amount if—
(a)
the CFC is resident in an EEA state for the accounting period,
and
(b)
the amount does not arise from the activities of a permanent
15
establishment which the CFC has in a territory which is not
an EEA state.
(6)
An amount falls within this subsection so far as it derives (directly or
indirectly) from a contract of insurance if—
(a)
the insured has no significant UK non-tax reason for entering
20
into the contract of insurance, or
(b)
if the contract of insurance is a contract of reinsurance, the
original insured has no significant UK non-tax reason for
entering into the original contract of insurance.
(7)
“UK non-tax reason” means a reason other than one relating to a
25
liability, or potential liability, of any person to tax or duty imposed
under the law of the United Kingdom.
Chapter 8
The CFC charge gateway: solo consolidation
371HA
The basic rule
30
(1)
The CFC’s profits falling within this Chapter for the purposes of step
2 in section 371BB(1) (the CFC charge gateway) are any amounts
included in its assumed total profits which are not also included in
the CFC’s relevant profits amount.
(2)
The CFC’s “relevant profits amount” is what the relevant profits
35
amount would be for the purposes of Chapter 3A of Part 2 of CTA
2009 (see section 18A(6) of that Act) in relation to the CFC were that
amount to be determined as if—
(a)
the CFC were a permanent establishment in a territory
outside the United Kingdom of the UK resident company
40
mentioned in section 371CG(2)(b) or the UK resident bank
mentioned in section 371CG(3), and
(b)
the CFC’s accounting period were a relevant accounting
period of that UK resident company or UK resident bank for
the purposes of that Chapter.
45

Finance (No. 4) Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
453

Chapter 9
Exemptions for profits from qualifying loan relationships
371IA
The basic rule
(1)
This Chapter applies if—
(a)
apart from this Chapter, Chapter 5 (non-trading finance
5
profits) would apply for a CFC’s accounting period,
(b)
the CFC’s non-trading finance profits include qualifying loan
relationship profits, and
(c)
the business premises condition set out in section 371DG is
met.
10
(2)
A chargeable company (“company C”) in relation to the accounting
period may make a claim to an officer of Revenue and Customs for
step 2 in section 371BB(1) (the CFC charge gateway) to be taken, in
the case of company C only, subject to this Chapter.
(3)
If company C makes a claim, in the case of company C only, the
15
CFC’s qualifying loan relationship profits pass through the CFC
charge gateway so far as (and only so far as) they are not exempt
under this Chapter.
(4)
The CFC’s “qualifying loan relationship profits” are the profits of all
its qualifying loan relationships taken together.
20
(5)
The extent to which those profits are “exempt” is to be determined—
(a)
firstly, by applying either section 371IB or section 371ID to
each of the CFC’s qualifying loan relationships, and
(b)
secondly, by applying section 371IE (if relevant).
(6)
Section 371IF sets out how to determine the profits of a qualifying
25
loan relationship.
(7)
Sections 371IG to 371II define “qualifying loan relationship” etc.
(8)
Section 371IJ contains provision about claims under this Chapter.
(9)
In this Chapter references to the CFC’s non-trading finance profits
are to those profits excluding any profits—
30
(a)
falling within section 371CB(3) or (4) or Chapter 8 (solo
consolidation), or
(b)
arising from a relevant finance lease.
(10)
In this Chapter—
(a)
“loan relationship” has the meaning given by section 302(1)
35
of CTA 2009 (and does not include anything which, although
not falling within section 302(1), is treated for any purpose as
if it were a loan relationship), and
(b)
other terms used which are defined in Part 5 of CTA 2009 are
to be read accordingly.
40
(11)
See section 371CB(8) which deals with the interaction between this
Chapter and section 371CB and Chapter 5 in the case of a chargeable
company which makes a claim under this Chapter.