(3) Profits fall within this subsection so far as they arise from the
investment of funds held by the CFC for the purposes of a trade—

(a) which is carried on by the CFC, and

(b) no trading profits of which pass through the CFC charge
5gateway for the accounting period.

(4) Profits fall within this subsection so far as they arise from the
investment of funds held by the CFC for the purposes of a UK
property business or overseas property business carried on by the
CFC.

(5) 10Neither subsection (3) nor subsection (4) applies in relation to
funds—

(a) held only or mainly because of a prohibition or restriction on
the CFC paying dividends or making other distributions
imposed under the law of the territory in which the CFC is
15incorporated or formed,

(b) held with a view to paying dividends or making other
distributions at a time after the end of the relevant 12 month
period,

(c) held with a view to acquiring shares in any company or
20making any capital contribution to a person,

(d) held with a view to acquiring, developing or otherwise
investing in land at a time after the end of the relevant 12
month period,

(e) held only or mainly for contingencies, or

(f) 25held only or mainly for the purpose of reducing or
eliminating a liability of any person to tax or duty imposed
under the law of any territory.

(6) Subsection (5)(a) does not cover a prohibition or restriction which
ceases to have effect before the end of the relevant 12 month period.

(7) 30“The relevant 12 month period” means the period of 12 months after
the end of the accounting period.

(8) In the case of a chargeable company which makes a claim under
Chapter 9, in this section and Chapter 5 references to the CFC’s non-
trading finance profits are to those profits excluding also the CFC’s
35qualifying loan relationship profits (as defined in Chapter 9).

371CC Incidental non-trading finance profits: the 5% rule

(1) This section applies in relation to a CFC’s accounting period if one or
both of the following requirements is met—

(a) the CFC has trading profits or property business profits (or
40both);

(b) the CFC has exempt distribution income and, at all times
during the accounting period, a substantial part of its
business is the holding of shares or securities in companies
which are its 51% subsidiaries.

(2) 45Chapter 5 does not apply for the accounting period if the CFC’s non-
trading finance profits are no more than 5% of the relevant amount.

(3) “The relevant amount” is—

(a) if the requirement of subsection (1)(a) is met, the total of the
CFC’s trading profits and property business profits
determined before deduction of interest or any tax or duty
imposed under the law of any territory,

(b) 5if the requirement of subsection (1)(b) is met, the total of the
CFC’s exempt distribution income, or

(c) if both those requirements are met, the sum of the totals given
by paragraphs (a) and (b).

(4) Subsection (5) applies for the purposes of subsection (2) if—

(a) 10the requirement of subsection (1)(b) is met (whether or not
the requirement of subsection (1)(a) is also met),

(b) at any time during the accounting period, a 51% subsidiary of
the CFC (“the CFC subsidiary”) is also a CFC, and

(c) the CFC subsidiary has relevant non-trading finance profits
15as determined in accordance with subsection (6) or (7).

(5) The CFC subsidiary’s relevant non-trading finance profits are to be
added to the CFC’s non-trading finance profits.

(6) If—

(a) the CFC subsidiary has an accounting period (“the relevant
20period”) which is the same as the CFC’s accounting period or
otherwise falls wholly within the CFC’s accounting period,
and

(b) by virtue of this section or section 371CD, Chapter 5 does not
apply (in the case of the CFC subsidiary) for the relevant
25period,

the CFC subsidiary’s “relevant non-trading finance profits” are its
non-trading finance profits for the relevant period.

(7) If—

(a) the CFC subsidiary has an accounting period (“the relevant
30period”) which otherwise overlaps with the CFC’s
accounting period, and

(b) by virtue of this section or section 371CD, Chapter 5 does not
apply (in the case of the CFC subsidiary) for the relevant
period,

35the CFC subsidiary’s “relevant non-trading finance profits” are a just
and reasonable proportion of its non-trading finance profits for the
relevant period.

(8) In this section references to the CFC’s trading profits are to those
profits excluding any of them which pass through the CFC charge
40gateway for the accounting period.

(9) “Exempt distribution income” means any dividends or other
distributions which are not brought into account in determining the
CFC’s assumed total profits on the basis that they would be exempt
for the purposes of Part 9A of CTA 2009 (company distributions).

(10) 45This section needs to be read with section 371CD.

371CD Incidental non-trading finance profits: the further 5% rule

(1) This section applies in relation to a CFC’s accounting period if—

(a) the requirements of section 371CC (1)(a) and (b) are both met,
but

(b) the CFC’s non-trading finance profits (as added to under
section 371CC (5) if applicable) are more than 5% of the
5relevant amount for the purposes of section 371CC (2).

(2) Chapter 5 does not apply for the accounting period if the CFC’s
adjusted non-trading finance profits are no more than 5% of the total
of the CFC’s exempt distribution income (as defined in section
371CC (9)).

(3) 10The CFC’s “adjusted non-trading finance profits” are its non-trading
finance profits excluding any profits falling within section 371CB (3)
or (4).

(4) Subsection (5) applies if any CFC subsidiary’s relevant non-trading
finance profits are added under section 371CC (5) to the CFC’s non-
15trading finance profits for the purposes of section 371CC (2).

(5) The CFC subsidiary’s relevant non-trading finance profits are also to
be added to the CFC’s adjusted non-trading finance profits for the
purposes of subsection (2) above.

371CE Does Chapter 6 apply?

(1) 20Subject to what follows, Chapter 6 (trading finance profits) applies
for a CFC’s accounting period if (and only if)—

(a) the CFC has trading finance profits, and

(b) at any time during the accounting period, the CFC has funds
or other assets which derive (directly or indirectly) from UK
25connected capital contributions.

(2) The CFC’s trading finance profits are to be treated for the purposes
of this Part as if they were non-trading finance profits (and,
accordingly, Chapter 6 cannot apply for the accounting period) if—

(a) the CFC is a group treasury company in the accounting
30period, and

(b) a notice is given to an officer of Revenue and Customs
requesting that the CFC’s trading finance profits be treated as
if they were non-trading finance profits.

(3) Section 316(5) to (11) (group treasury companies) applies for the
35purpose of determining if a CFC is a “group treasury company” as if
references to the relevant period were to the accounting period.

(4) A notice under subsection (2)(b)—

(a) may be given only by a company or companies determined
under subsection (5) or (6), and

(b) 40must be given—

(i) within 20 months after the end of the accounting
period, or

(ii) within such longer period as an officer of Revenue
and Customs may allow.

(5) 45A company may give a notice if—

(a) the company would be a chargeable company were section
371BC (charging the CFC charge) to apply in relation to the
accounting period, and

(b) the percentage of the CFC’s chargeable profits which would
5be apportioned to the company at step 3 in section 371BC (1)
would represent more than half of X%.

(6) Two or more companies may together give a notice if—

(a) the companies would all be chargeable companies were
section 371BC (charging the CFC charge) to apply in relation
10to the accounting period, and

(b) the percentage of the CFC’s chargeable profits which would
be apportioned to the companies, taken together, at step 3 in
section 371BC (1) would represent more than half of X%.

(7) In subsections (5) and (6) “X%” means the total percentage of the
15CFC’s chargeable profits which would be apportioned to chargeable
companies at step 3 in section 371BC (1) were section 371BC
(charging the CFC charge) to apply in relation to the accounting
period.

371CF Does Chapter 7 apply?

(1) 20Chapter 7 (captive insurance business) applies for a CFC’s
accounting period if (and only if)—

(a) at any time during the accounting period, the main part of the
CFC’s business is insurance business, and

(b) the CFC’s assumed total profits include amounts falling
25within subsection (2).

(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) 30a 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
35goods or services to the UK resident person
(excluding services provided as part of insurance
business).

371CG Does Chapter 8 apply?

(1) Chapter 8 (solo consolidation) applies for a CFC’s accounting period
40if (and only if) condition A or B is met.

(2) Condition A is that, at any time during the accounting period—

(a) the CFC is a subsidiary undertaking which is the subject of a
solo consolidation waiver under section BIPRU 2.1 of the FSA
Handbook, and

(b) 45the CFC’s parent undertaking in relation to that waiver is a
UK resident company.

(3) Condition B is that, at any time during the accounting period—

(a) the CFC is controlled (either alone or with other persons) by
a UK resident bank which holds shares in the CFC,

(b) the UK resident bank must meet requirements of the FSA
Handbook in relation to its capital,

(c) 5any fall in the value of the shares held in the CFC would be
(wholly or mainly) ignored for the purpose of determining if
the UK resident bank meets those requirements of the FSA
Handbook, and

(d) the main purpose, or one of the main purposes, of the UK
10resident bank in holding the shares in the CFC is to obtain a
tax advantage for itself or any company connected with it.

(4) In this section—

• “the FSA Handbook” means the Handbook of Rules and
  Guidance made by the Financial Services Authority (as that
  15Handbook has effect from time to time), and

• “UK resident bank” means a UK resident person carrying on
  banking business.

(5) The Treasury may by regulations amend this Chapter or Chapter 8
as they consider appropriate to take account of—

(a) 20any changes to the FSA Handbook, or

(b) any relevant document published by the Financial Services
Authority from time to time.

(6) “Relevant document” means—

(a) a document which replaces the FSA Handbook, or

(b) 25a document which changes or replaces a document falling
within paragraph (a) or a document which is a relevant
document by virtue of this paragraph.

Chapter 4

The CFC charge gateway: profits attributable to UK activities

371DA Introduction to Chapter

(1) 30Take the steps set out in section 371DB (1) to determine the CFC’s
profits falling within this Chapter for the purposes of step 2 in
section 371BB (1) (the CFC charge gateway).

(2) In this Chapter references to the CFC’s assumed total profits are to
those profits excluding its non-trading finance profits and property
35business profits (if any).

(3) For the purposes of this Chapter—

(a) “the OECD Report” means the Report on the Attribution of
Profits to Permanent Establishments of the Organisation for
Economic Co-operation and Development (“OECD”) dated
4022 July 2010,

(b) terms used which are also used in the OECD Report have the
same meaning as they have in the OECD Report,

(c) “the CFC group” means the CFC taken together with the
companies with which it is connected as those companies
45may change from time to time,

(d) “the provisional Chapter 4 profits” has the meaning given at
step 7 in section 371DB (1),

(e) “the relevant assets and risks” has the meaning given at step
1 in section 371DB (1), subject to any exclusions at step 2 or 6,

(f) 5“SPF” means a significant people function or a key
entrepreneurial risk-taking function,

(g) an SPF is a “UK SPF” so far as the SPF is carried out in the
United Kingdom—

(i) by the CFC, otherwise than through a UK permanent
10establishment, or

(ii) by a company connected with the CFC, and

(h) an SPF is a “non-UK SPF” so far as it is not a UK SPF.

(4) The Treasury may by regulations amend this Chapter as they
consider appropriate to take account of any relevant document
15published by OECD from time to time.

(5) “Relevant document” means—

(a) a document which replaces, updates or supplements the
report mentioned in subsection (3)(a), or

(b) a document which replaces, updates or supplements a
20document falling within paragraph (a) or a document which
is a relevant document by virtue of this paragraph.

371DB The steps

(1) Here are the steps referred to in section 371DA (1).

The steps are to be taken in accordance with the principles set out in
25the OECD Report (so far as relevant).

Step 1

Identify the assets which the CFC has or has had, and the risks which
the CFC bears or has borne, and from which amounts included in the
CFC’s assumed total profits have arisen.

30 Step 2

Exclude from the relevant assets and risks any asset or risk to which
subsection (2) applies (subject to subsections (3) and (4)).

Step 3

Identify the SPFs carried out by the CFC group which are relevant
35to—

• the economic ownership of the assets included in the relevant
  assets and risks, or

• the assumption and management of the risks included in the
  relevant assets and risks.

40 Step 4

Determine the extent to which the SPFs identified at step 3 are UK
SPFs and the extent to which they are non-UK SPFs.

Step 5

Assume that the UK SPFs determined at step 4 are carried out by a
45permanent establishment which the CFC has in the United Kingdom
and, accordingly, determine the extent to which the assets and risks
included in the relevant assets and risks would be attributed to the
permanent establishment.

Step 6

50Exclude from the relevant assets and risks any asset or risk, or any
assets or risks taken together, to which section 371DC applies.

Step 7

Re-determine the CFC’s assumed total profits on the basis that the
CFC—

• 55does not hold, or has not held, the assets included in the
  relevant assets and risks, and

• does not bear, or has not borne, the risks included in the
  relevant assets and risks,

so far as they would be attributed to the permanent establishment
60mentioned at step 5.

Step 8

Exclude from the provisional Chapter 4 profits any amounts which
are required to be excluded by section 371DD, 371DE or 371DF.

(2) This subsection applies to an asset or risk if the CFC’s assumed total
profits are only negligibly higher than what they would be if the
CFC—

(a) did not hold, or had not held, the asset to any extent at all, or

(b) 5did not bear, or had not borne, the risk to any extent at all.

(3) The total number of assets and risks which may be excluded at step
2 in subsection (1) is limited as follows.

(4) As well as applying to each asset and risk separately, subsection (2)
must also apply to all the assets and risks included in the total
10number taken together.

371DC Exclusion: UK activities a minority of total activities

(1) For the purposes of step 6 in section 371DB (1), this section applies to
an asset or risk included in the relevant assets and risks if amount A
is no more than 50% of amount B.

(2) 15Amount A is the total of—

(a) the gross amounts (that is, the amounts before deduction of
expenses or transfers to or from reserves) of the CFC’s
income which would not have become receivable during the
accounting period had the CFC—

(i) 20not held the asset, or

(ii) not borne the risk,

so far as it would be attributed to the permanent
establishment mentioned at step 5 in section 371DB (1), and

(b) the additional expenses which the CFC would have incurred
during the accounting period had the CFC—

(i) 5not held the asset, or

(ii) not borne the risk,

so far as it would be so attributed.

(3) Amount B is the total of—

(a) the gross amounts (that is, the amounts before deduction of
10expenses or transfers to or from reserves) of the CFC’s
income which would not have become receivable during the
accounting period had the CFC—

(i) not held the asset to any extent at all, or

(ii) not borne the risk to any extent at all, and

(b) 15the additional expenses which the CFC would have incurred
during the accounting period had the CFC—

(i) not held the asset to any extent at all, or

(ii) not borne the risk to any extent at all.

(4) Subsection (5) applies if it is not reasonably practicable to separate a
20number of assets or risks included in the relevant assets and risks for
the purpose of determining amounts A and B in relation to each of
those assets or risks separately.

(5) In subsections (1) to (3) references to an asset or risk are to be read as
references to those assets or risks taken together.

371DD 25 Exclusion: economic value

(1) Subsection (2) applies if—

(a) an asset or risk is included in the relevant assets and risks,

(b) the SPFs which are relevant to the economic ownership of the
asset, or the assumption and management of the risk, are
30wholly or partly UK SPFs as determined at step 4 in section
371DB (1), and

(c) as a result of that determination, an amount is included in the
provisional Chapter 4 profits.

(2) The amount is to be excluded from the provisional Chapter 4 profits
35if—

(a) the net economic value to the CFC group which results from
the holding of the asset, or the bearing of the risk, exceeds
what that value would have been had the asset been held, or
the risk been borne, solely by UK resident companies
40connected with the CFC, and

(b) the relevant non-tax value is a substantial proportion of the
excess value mentioned in paragraph (a).

(3) “Net economic value” does not include any value which derives
(directly or indirectly) from the reduction or elimination of any
45liability of any person to tax or duty imposed under the law of any
territory outside the United Kingdom.

(4) “The relevant non-tax value” is the excess value mentioned in
subsection (2)(a) so far as it does not derive (directly or indirectly)
from the reduction or elimination of any liability of any person to tax
or duty imposed under the law of the United Kingdom.

(5) 5Subsection (6) applies if—

(a) there are SPFs which are relevant to the economic ownership
of a number of assets, or the assumption and management of
a number of risks, included in the relevant assets and risks,
and

(b) 10it is not reasonably practicable to separate those assets or
risks for the purpose of determining the extent to which the
SPFs are relevant to the economic ownership of each of those
assets, or the assumption and management of each of those
risks, separately.

(6) 15In subsections (1) and (2) references to an asset or risk are to be read
as references to those assets or risks taken together.

371DE Exclusion: independent companies’ arrangements

(1) Subsection (2) applies if—

(a) an asset or risk is included in the relevant assets and risks,

(b) 20the SPFs which are relevant to the economic ownership of the
asset, or the assumption and management of the risk, are
wholly or partly UK SPFs as determined at step 4 in section
371DB (1),

(c) as a result of that determination, an amount is included in the
25provisional Chapter 4 profits, and

(d) the UK SPFs are carried out by companies connected with the
CFC under arrangements made between the CFC and those
companies.

(2) The amount is to be excluded from the provisional Chapter 4 profits
30if it is reasonable to suppose that, were the SPFs which are UK SPFs
not to be carried out by companies connected with the CFC, the CFC
would enter into arrangements with companies not connected with
the CFC which—

(a) would be structured in the same way as the arrangements
35mentioned in subsection (1)(d), and

(b) would, in relation to the CFC’s business, have the same
commercial effect as those arrangements.

(3) Subsection (4) applies if—

(a) there are SPFs which are relevant to the economic ownership
40of a number of assets, or the assumption and management of
a number of 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
45SPFs are relevant to the economic ownership of each of those
assets, or the assumption and management of each of those
risks, separately.

(4) In subsection (1) references to an asset or risk are to be read as
references to those assets or risks taken together.

371DF Exclusion: trading profits (the basic rule)

(1) All trading profits are to be excluded from the provisional Chapter 4
profits if the following conditions are met—

(a) the business premises condition (see section 371DG),

(b) 5the income condition (see section 371DH),

(c) the management expenditure condition (see section 371DI),

(d) the IP condition (see section 371DJ), and

(e) the export of goods condition (see section 371DK).

(2) Trading profits are also to be excluded from the provisional Chapter
104 profits in accordance with section 371DI (7) and (8) (so far as
applicable).

(3) This section is subject to section 371DL (anti-avoidance).

371DG Exclusion: trading profits (business premises condition)

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

(2) 15The business premises condition is met if, at all times during the
accounting period, the CFC has in the territory in which it is resident
for the accounting period premises—

(a) which are, or are intended to be, occupied and used with a
reasonable degree of permanence, and

(b) 20from which the CFC’s activities in that territory are wholly or
mainly carried on.

(3) “Premises” means—

(a) an office, shop, factory or other building or part of a building,

(b) a mine, an oil or gas well, a quarry or other place of extraction
25of natural resources, or

(c) a building site or the site of a construction or installation
project, but only if the building work or project has a duration
of at least 12 months.

371DH Exclusion: trading profits (income condition)

(1) 30This section applies for the purposes of section 371DF (1)(b).

(2) The income condition is met if no more than 20% of the CFC’s
relevant trading income derives (directly or indirectly) from—

(a) UK resident persons, or

(b) UK permanent establishments of non-UK resident
35companies.

(3) For the purposes of subsection (2) the CFC’s “relevant trading
income” is its trading income, excluding any income arising from the
sale in the United Kingdom of goods produced by the CFC in the
territory in which it is resident for the accounting period.

(4) 40Subsection (5) applies instead of subsection (2) if, at any time during
the accounting period, the CFC’s main business is banking business
in relation to which the CFC is regulated in the territory in which it
is resident for the accounting period.