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Finance (No. 4) BillPage 440

(5) The income condition is met if the CFC’s relevant UK trading income
is no more than 10% of the CFC’s trading income.

(6) The CFC’s “relevant UK trading income” is its trading income so far
as it derives (directly or indirectly) from—

(a) 5UK 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) 10Neither 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) 15an 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) 20The 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
25CFC—

(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
30indirectly) 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
35indirectly) 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
40management 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
45arrangement 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

Finance (No. 4) BillPage 441

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
5assets 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) 10the 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) 15there 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
20the 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
25is 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
30and 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) 35Subsections (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) 40the 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
45persons related to the CFC at times during the
relevant period, or

Finance (No. 4) BillPage 442

(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) 5as 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
10derived, 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
15exploited 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
20this 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)
25for 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
30period 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
35Kingdom, 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) 40the 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) 45The 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).

Finance (No. 4) BillPage 443

(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) 5the 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
10in 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
15finance 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 20 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) 25Non-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
30from 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
35account 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) 40There 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—

Finance (No. 4) BillPage 444

(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) 5funds 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
10indirectly) 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) 15funds 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) 20which 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) 25UK 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) 30Non-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) 35with 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) 40it 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) 45that 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.

Finance (No. 4) BillPage 445

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) 5The 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
10CFC 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
15which 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

20The 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).

25This 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
30company.

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
35on 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.

Step 3

If no excesses are determined at steps 1 and 2, no profits fall within
40this Chapter.

Finance (No. 4) BillPage 446

(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) 5For 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) 10the 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
15insurance 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) 20during 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
25which 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) 30the 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
35on 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—


40where—

  • 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.

Finance (No. 4) BillPage 447

(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
5partly 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
10amount 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
15in 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,

20with 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
25company 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.

30 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

35Multiply 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
40apply 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.

Finance (No. 4) BillPage 448

(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) 5the 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
10apply 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
15contracts 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) 20the 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 25 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) 30fall 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) 35a 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) 40is 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
45of insurance if—

Finance (No. 4) BillPage 449

(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
5of 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
10the 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) 15the 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) 20the 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) 25UK 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) 30The 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
35amount 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
40mentioned 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.

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