Finance (No. 4) Bill (HC Bill 325)

(a) UK resident persons, or

(b) UK permanent establishments of non-UK resident companies,

but excluding interest received from UK resident companies which are connected or associated with the CFC.

(7) Neither subsection (2)(a) nor subsection (6)(a) covers income deriving (directly or indirectly) from a UK resident company if—

(a) the company has made an election under section 18A of CTA 2009 (exemption for profits or losses of foreign permanent establishments), and

(b) an expense corresponding to the income is brought into account for the purpose of determining any exemption adjustment in relation to the company under that section.

371DI Exclusion: trading profits (management expenditure condition)

(1) This section applies for the purposes of section 371DF (1)(c).

(2) The management expenditure condition is met if the UK related management expenditure is no more than 20% of the total related management expenditure.

(3) “The total related management expenditure” is the total of the following expenditure incurred during the accounting period by the CFC—

(a) expenditure incurred in the employment of any member of the CFC’s staff who carries out relevant management functions,

(b) expenditure incurred in the engagement (directly or indirectly) of any individual who is not a member of the CFC’s staff but who carries out relevant management functions in consequence of an arrangement between the individual and the CFC, and

(c) expenditure incurred in the engagement (directly or indirectly) of any company related to the CFC so far as the expenditure represents expenditure incurred by the related company in—

(i) the employment of any member of the related company’s staff who carries out relevant management functions, or

(ii) the engagement by the related company (directly or indirectly) of any individual who is not a member of the related company’s staff but who carries out relevant management functions in consequence of an arrangement between the individual and the related company.

(4) “The UK related management expenditure” is the total related management expenditure so far as it relates to a member of staff or

other individual who carries out relevant management functions in the United Kingdom.

(5) A person carries out a “relevant management function” if the person manages or controls any assets or risks included in the relevant assets and risks.

(6) This covers (for example) a person who formulates plans or makes decisions in relation to—

(a) the acquisition, creation, development or exploitation of such assets, or

(b) the taking on, or bearing of, such risks.

(7) Subsection (8) applies if—

(a) the conditions mentioned in section 371DF (1)(a), (b), (d) and (e) are met but the management expenditure condition is not met,

(b) there is an asset or risk which is included in the relevant assets and risks and to which any part of the total related management expenditure relates,

(c) the 50% condition is met in relation to that asset or risk, and

(d) trading profits arising from that asset or risk are included in the provisional Chapter 4 profits.

(8) The trading profits are to be excluded from the provisional Chapter 4 profits.

(9) The 50% condition is met in relation to an asset or risk if the UK related management expenditure so far as relating to the asset or risk is no more than 50% of the total related management expenditure so far as relating to the asset or risk.

(10) Subsection (11) applies if—

(a) any part of the total related management expenditure relates to a number of assets or risks included in the relevant assets and risks, and

(b) it is not reasonably practicable to separate those assets or risks for the purpose of determining the extent to which the total related management expenditure relates to each of those assets or risks separately.

(11) Subsections (7) to (9) apply in relation to those assets or risks taken together and references to an asset or risk are to be read accordingly.

371DJ Exclusion: trading profits (IP condition)

(1) This section applies for the purposes of section 371DF (1)(d).

(2) The IP condition is met unless—

(a) the CFC’s assumed total profits include amounts arising from intellectual property held by the CFC (“the exploited IP”),

(b) all or parts of the exploited IP were—

(i) transferred (directly or indirectly) to the CFC by persons related to the CFC at times during the relevant period, or

(ii) otherwise derived (directly or indirectly) at times during that period out of or from intellectual property held at times during that period by persons related to the CFC,

(c) as a result of those transfers or other derivations, the value of the intellectual property held by those persons related to the CFC, taken together, has been significantly reduced from what it would otherwise have been, and

(d) if only parts of the exploited IP were so transferred or derived, the significance condition is met.

(3) The significance condition is met if—

(a) the parts of the exploited IP (“the UK derived IP”) which were transferred or otherwise derived as mentioned in subsection (2)(b) are, taken together, a significant part of the exploited IP, or

(b) as a result of the transfers or other derivations of the UK derived IP, the CFC’s assumed total profits are significantly higher than what they would otherwise have been.

(4) In relation to a non-UK resident person who is related to the CFC, in this section references to the transfer or holding of intellectual property by a person related to the CFC are limited to, as the case may be—

(a) the transfer of intellectual property which before the transfer was held by the non-UK resident person (wholly or partly) for the purposes of a permanent establishment which the person has in the United Kingdom, or

(b) the holding of intellectual property by the non-UK resident person (wholly or partly) for those purposes.

(5) “The relevant period” means the period covering the accounting period and the 6 years before the accounting period.

371DK Exclusion: trading profits (export of goods condition)

(1) This section applies for the purposes of section 371DF (1)(e).

(2) The export of goods condition is met if no more than 20% of the CFC’s trading income arises from goods exported from the United Kingdom, excluding goods exported from the United Kingdom to the territory in which the CFC is resident for the accounting period.

371DL Exclusion: trading profits (anti-avoidance)

(1) This section applies if—

(a) a condition mentioned in section 371DF (1) is met, or

(b) the 50% condition mentioned in section 371DI is met in relation to an asset or risk (or a number of assets or risks taken together),

but it is reasonable to suppose that that would not be the case apart from an arrangement falling within subsection (3).

(2) The condition is to be taken not to be met or (as the case may be) not to be met in relation to the asset or risk (or the assets or risks taken together).

(3) An arrangement falls within this subsection if—

(a) the arrangement involves the CFC group organising (or reorganising) a significant part of its business in a particular way, and

(b) the main purpose, or one of the main purposes, of that organising (or reorganising) is to secure that—

(i) one or more of the conditions mentioned in section 371DF (1) are met, or

(ii) the 50% condition mentioned in section 371DI is met in relation to one or more assets or risks.

Chapter 5

The CFC charge gateway: non-trading finance profits

371EA 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 its non-trading finance profits so far as they fall within any of sections 371EB to 371EE.

(2) In this Chapter references to the CFC’s non-trading finance profits are to be read in accordance with section 371CB (2) and, so far as applicable, section 371CB (8).

371EB UK activities

(1) To determine the extent to which the CFC’s non-trading finance profits fall within this section, take steps 1 to 5 and 7 in section 371DB (1) as if references in section 371DB to the CFC’s assumed total profits were references to its non-trading finance profits.

(2) Non-trading finance profits fall within this section so far as they would be included in the provisional Chapter 4 profits as determined on the basis mentioned in subsection (1).

371EC Capital investment from the UK

(1) Non-trading finance profits fall within this section so far as they arise from relevant UK funds or other assets.

(2) Subsection (3) applies in relation to any profits which (apart from subsection (3)) would fall within this section if—

(a) an amount of expenditure incurred by the CFC in managing the relevant UK funds or other assets itself was brought into account in calculating the profits, and

(b) it is reasonable to suppose that the amount of expenditure is less than the fee which a company not connected with the CFC would charge the CFC for carrying out the same management activities.

(3) There is to be deducted from the profits an amount representing what it is reasonable to suppose the difference between the amount of expenditure and the fee would be.

(4) “Relevant UK funds or other assets” means—

(a) funds or other assets which derive (directly or indirectly) from any capital contribution to the CFC made (directly or indirectly) by a UK connected company (whether in relation to an issue of shares in the CFC or otherwise),

(b) funds or other assets which represent, or derive (directly or indirectly) from, any amounts included in the CFC’s chargeable profits for any earlier accounting period in relation to which the CFC charge is charged,

(c) funds or other assets which represent, or derive (directly or indirectly) from, any amounts which, by virtue of section 174 (transfer pricing: claims by disadvantaged person), are left out of account in determining the CFC’s assumed total profits for the accounting period or any earlier accounting period, or

(d) funds or other assets—

(i) which represent, or derive (directly or indirectly) from, any funds or other assets received by the CFC (directly or indirectly) from a UK connected company, and

(ii) which are not covered by paragraphs (a) to (c).

(5) In subsection (4)(d)(i) the reference to funds or other assets received by the CFC does not include funds or other assets received—

(a) in exchange for goods or services provided by the CFC, or

(b) by way of a loan.

(6) “UK connected company” means—

(a) a UK resident company connected with the CFC, or

(b) a non-UK resident company connected with the CFC acting through a UK permanent establishment.

371ED Arrangements in lieu of dividends etc to UK resident companies etc

(1) Non-trading finance profits fall within this section so far as they arise from an arrangement (other than a relevant finance lease) in relation to which the following condition is met.

(2) The condition is that—

(a) the arrangement 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 establishment of the non-UK resident company, and

(b) it is reasonable to suppose—

(i) that the arrangement is made as an alternative to the CFC paying dividends or making any other distribution to the other company (directly or indirectly), and

(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.

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—

(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 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

(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

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).

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

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 company.

If there is excess free capital, “the step 1 amount” is—

• the excess free capital, or

• if less, the CFC’s free capital so far as deriving (directly or indirectly) from UK connected capital contributions.

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 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—

• the excess free assets, or

• if less, the CFC’s free assets so far as deriving (directly or indirectly) from UK connected capital contributions.

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 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 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).

(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 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 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.

(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

(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.

(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—

where—

(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,

(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 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 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, 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 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.

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

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 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 arise from banking business, or banking business of a specified description, carried on by the CFC.

(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 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 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 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 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

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,

(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—

(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

(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 of insurance if—

(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 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 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 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 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 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

(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 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 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.

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 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.

(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 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.

(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 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—

(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) 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.

(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.

371IB Loans funded out of qualifying resources

(1) This section applies to a qualifying loan relationship if company C’s claim under this Chapter states that this section is to apply to the qualifying loan relationship.

(2) X% of the profits of the qualifying loan relationship are exempt if company C’s claim establishes—

(a) that, at all times during the relevant period, at least X% of the principal outstanding on the relevant loan (as that may vary from time to time during the relevant period) is funded by the CFC wholly out of qualifying resources, and

(b) that the ultimate debtor in relation to the qualifying loan relationship (see section 371IG (2) to (7)) is resident at all times during the relevant period in one territory only and that its territory of residence does not change at any time during the relevant period.

(3) “X%” is the percentage specified in company C’s claim for the purposes of this section in relation to the qualifying loan relationship (which may be 100%).

(4) “The relevant period” means—

(a) the accounting period, or

(b) if for any part of the accounting period no principal is outstanding on the relevant loan, the part of the accounting period during which there is principal outstanding.

(5) “The relevant loan” means the loan which is the subject of the qualifying loan relationship.

(6) “Qualifying resources” means—

(a) profits of the CFC’s business so far as it consists of the making of loans to relevant members of the CFC group which are used solely for the purposes of the business of the CFC group in the relevant territory, or

(b) funds or other assets received by the CFC in relation to shares held by the CFC in, or issued by the CFC to, members of the CFC group.

(7) Funds or other assets received by the CFC fall within subsection (6)(b) only so far as they derive (directly or indirectly) from—

(a) profits of the business of the CFC group in the relevant territory,

(b) the qualifying value of relevant pre-acquisition funds or other assets (see section 371IC), or

(c) an issue of shares which meets the following requirements—

(i) the shares are shares in a member of the CFC group (“the parent member”) which is not the 75% subsidiary of any company,

(ii) the shares are ordinary shares which are not redeemable, and

(iii) the shares are issued to persons who are not members of the CFC group.

(8) Subsection (9) applies if the qualifying loan relationship is made under, or is otherwise connected (directly or indirectly) with, an arrangement under which one or more members of the CFC group take on debt in the United Kingdom.

(9) It is to be assumed for the purposes of subsection (2) that, at all times during the relevant period, the amount of funds or other assets—

(a) out of which the principal outstanding on the relevant loan is funded by the CFC, and

(b) which are not qualifying resources,

is no less than the amount of the debt mentioned in subsection (8).

(10) For the purposes of this section and section 371IC—

(a) subject to subsections (11) and (12), “the CFC group”, as at any time, means the CFC taken together with the companies with which it is connected at that time,

(b) a member of the CFC group is “relevant” if it is resident in the relevant territory and no other territory,

(c) “the relevant territory” means the territory of residence of the ultimate debtor mentioned in subsection (2)(b),

(d) references to the business of the CFC group in the relevant territory do not include the making of loans to persons resident outside the relevant territory,

(e) references to the profits of the business of the CFC group in the relevant territory do not include—

(i) profits arising (directly or indirectly) from funds or other assets received by relevant members of the CFC group in relation to shares held by them in members of the CFC group which are not relevant members, or

(ii) so far as not covered by sub-paragraph (i), profits arising (directly or indirectly) from the business of the CFC group in any territory outside the relevant territory, and

(f) section 931U of CTA 2009 (definitions of “ordinary share” and “redeemable”) applies as it applies for the purposes of Part 9A of CTA 2009 (company distributions).

(11) If the CFC is controlled by one UK resident company only (“the controller”), in relation to any time before the CFC came to be controlled by the controller, except in subsection (6), references to the CFC group include references to the controller taken together with any companies with which it is connected at that time.

(12) If the CFC is controlled by two or more UK resident companies which are all connected with each other (“the controllers”), in relation to any time—

(a) before which the CFC came to be controlled by the controllers, and

(b) at which the controllers (or those of the controllers which exist at that time) are all connected with each other,

except in subsection (6), references to the CFC group include references to the controllers (or those of the controllers which exist) taken together with any other companies with which they are all connected at that time.

371IC What is the “qualifying value” of “relevant pre-acquisition funds or other assets”?

(1) This section applies for the purposes of section 371IB (7)(b).

(2) It applies if—

(a) a member of the CFC group acquires shares in a company (“the target company”) from persons who are not members of that group (“the unconnected persons”),

(b) in consideration for the acquisition of the shares, a member of the CFC group (“the parent member”) which is not the 51% subsidiary of any company issues shares to the unconnected persons, and

(c) the value of the consideration given for the acquisition of the shares by the parent member and any other members of the CFC group represents wholly or partly the value or a part of the value of any funds or other assets held by the target company.

(3) Those funds or other assets are “relevant pre-acquisition funds or other assets” and, subject to what follows, their value or the part of their value represented by the value of the consideration is their “qualifying value”.

(4) The qualifying value is to be reduced by Y% if one or both of the following paragraphs applies—

(a) the issue of shares by the parent member to the unconnected persons represents only part of the consideration given for the acquisition of the shares in the target company;

(b) in connection with the acquisition of the shares in the target company, an extraordinary distribution is made to persons holding shares in the parent member.

(5) “Y%” is given by the following formula—

where—

371ID The 75% exemption

(1) This section applies to a qualifying loan relationship if section 371IBdoes not apply to the qualifying loan relationship.

(2) 75% of the profits of the qualifying loan relationship are exempt.

371IE Matched interest

(1) This section applies if—

(a) there are profits of qualifying loan relationships (“the leftover profits”) which are not exempt after either section 371IB or section 371ID has been applied to each qualifying loan relationship,

(b) the relevant corporation tax accounting period (as defined in section 371BC (3)) in relation to company C is a relevant accounting period of company C in relation to a period of account of the worldwide group, and

(c) apart from this section, the charging of the CFC charge would, by virtue of section 314A (finance income amounts of chargeable companies), result in company C having a finance income amount for the period of account which includes the leftover profits.

(2) All the leftover profits are exempt if, ignoring the relevant amounts, the tested income amount for the period of account is equal to or exceeds the tested expense amount for that period.

(3) Otherwise, Z% of the leftover profits are exempt if the relevant amounts would cause the tested income amount for the period of account to exceed the tested expense amount for that period.

(4) “Z%” is given by the following formula—

where—

(5) “The relevant amounts” are—

(a) the finance income amount for the period of account which company C would have as mentioned in subsection (1)(c) so far as it would include the leftover profits, and

(b) any other finance income amounts for the period of account corresponding to the amount given by paragraph (a) which members of the worldwide group who make claims under this Chapter in relation to any CFC would have.

(6) Terms used in this section which are defined in Part 7 (tax treatment of financing costs and income) have the same meaning as they have in Part 7.

(7) Part 7 has effect for the purposes of this section with the following modifications.

(8) In section 261 (application of Part 7) the following are to be omitted—

(a) in subsection (1), the words from “for which” to the end, and

(b) subsections (2) to (5).

(9) Debits, credits and other amounts arising from banking business or insurance business are to be ignored for the purpose of determining what any finance income amount, the tested income amount or the tested expense amount would be for a period of account of the worldwide group.

(10) Section 337(1)(a) (which limits “the worldwide group” to “large” groups) is to be omitted.

371IF Determining the profits of a qualifying loan relationship

Take the following steps to determine the profits of a qualifying loan relationship for the purposes of this Chapter.

Step 1

Determine the credits from the qualifying loan relationship which are brought into account in determining the CFC’s non-trading finance profits.

The result is “the step 1 credits”.

Step 2

Determine the credits (so far as not reflected in the step 1 credits) and debits which are brought into account in determining the CFC’s non-trading finance profits so far as they—

• are from any derivative contract or other arrangement (which is not itself a qualifying loan relationship of the CFC) entered into by the CFC as a hedge of risk in connection with the qualifying loan relationship, and

• are attributable to the hedge of risk.

If the credits exceed the debits add the excess to the step 1 credits and if the debits exceed the credits subtract the deficit from the step 1 credits.

The result is “the step 2 credits”.

Step 3

Allocate to the qualifying loan relationship a just and reasonable proportion of the credits (so far as not reflected in the step 2 credits) from the CFC’s loan relationships (so far as they are not qualifying loan relationships) which are brought into account in determining the CFC’s non-trading finance profits.

Add the credits to the step 2 credits.

The result is “the step 3 credits”.

Step 4

Allocate to the qualifying loan relationship a just and reasonable proportion of the debits (so far as not reflected in the step 3 credits) from the CFC’s loan relationships which are brought into account in determining the CFC’s non-trading finance profits.

Reduce the step 3 credits accordingly to give the profits of the qualifying loan relationship.

371IG What is a “qualifying loan relationship”?

(1) In this Chapter “qualifying loan relationship” means a creditor relationship of the CFC—

(a) the ultimate debtor in relation to which is a qualifying company, and

(b) which is not prevented from being a qualifying loan relationship by section 371IH.

(2) In this Chapter “the ultimate debtor”, in relation to a creditor relationship of the CFC, means the debtor in relation to the creditor relationship.

This is subject to what follows.

This is subject to what follows.

(3) Subsection (4) or (5) (as the case may be) applies if—

(a) there is a loan (“loan A”) which is the subject of a creditor relationship of the CFC,

(b) loan A, or a part of loan A, is made and used to fund (directly or indirectly) another loan (“loan B”) to a person (“P”), and

(c) loan B, or a part of loan B, is not made and used to fund (directly or indirectly) a further loan to any person.

(4) If all of loan A is made and used to fund (directly or indirectly) loan B, the ultimate debtor in relation to the CFC’s creditor relationship mentioned in subsection (3)(a) is P.

(5) If only part of loan A is made and used to fund (directly or indirectly) loan B—

(a) that part of loan A is to be treated for the purposes of this Chapter as a separate loan giving rise to a separate creditor relationship of the CFC, and

(b) the ultimate debtor in relation to that separate creditor relationship is P.

(6) If the requirement of subsection (3)(c) is met in relation to a part of loan B only, in subsections (4) and (5) references to loan B are to be read as references to that part of loan B only.

(7) But neither subsection (4) nor subsection (5) applies if—

(a) the debtor (“D”) in relation to the CFC’s creditor relationship is a qualifying company the main business of which is banking business or insurance business,

(b) the use of loan A, or the part of loan A, as mentioned in subsection (3)(b) occurs in the ordinary course of D’s banking business or insurance business, and

(c) P is not a UK resident qualifying company or, if P is, P’s main business is banking business or insurance business.

(8) In this section “qualifying company” means a company which—

(a) is connected with the CFC, and

(b) is controlled by the UK resident person or persons who control the CFC.

371IH Exclusions from definition of “qualifying loan relationship”

(1) If the ultimate debtor in relation to a creditor relationship of the CFC is a non-UK resident company, the creditor relationship cannot be a qualifying loan relationship so long as some or all of the company’s debits—

(a) are being brought into account for the purposes of Chapter 4 of Part 2 of CTA 2009 (UK permanent establishments of non-UK resident companies) in determining the company’s profits which are attributable to a UK permanent establishment, or

(b) are being brought into account for the purposes of Part 3 of ITTOIA 2005 (property income) in determining the company’s profits of a UK property business.

(2) If the ultimate debtor in relation to a creditor relationship of the CFC is a UK resident company, the creditor relationship can be a qualifying  loan relationship only so long as—

(a) an election under section 18A of CTA 2009 (exemption for profits or losses of foreign permanent establishments) is in effect in relation to the company, and

(b) all the company’s debits are being brought into account for the purpose of determining exemption adjustments in relation to the company under that section.

(3) If the ultimate debtor in relation to a creditor relationship of the CFC is another CFC, the creditor relationship cannot be a qualifying loan relationship so long as—

(a) some or all of the other CFC’s debits are relevant to the application of Chapters 3 to 8 or Chapter 12 in the case of the other CFC, and

(b) as a result of that, the CFC charge is not being charged in relation to the other CFC’s accounting periods or any sums charged are less than what they would otherwise have been.

(4) In subsections (1) to (3) references to the debits of the company which is the ultimate debtor in relation to a creditor relationship of the CFC are references to—

(a) the ultimate debtor’s debits in relation to the loan which is the subject of the CFC’s creditor relationship, or

(b) if the ultimate debtor is determined in accordance with section 371IG (4) or (5), the ultimate debtor’s debits in relation to loan B.

(5) A creditor relationship of the CFC cannot be a qualifying loan relationship if it is, or is connected (directly or indirectly) to, an arrangement the main purpose, or one of the main purposes, of which is for the ultimate debtor in relation to the creditor relationship to provide (directly or indirectly) funding for a loan to another person.