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
5profits) 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) 10A 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
15CFC’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) 20The 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
25loan 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) 30falling 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)
35of 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) 40See 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) 5X% 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
10the 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
15relevant 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) 20the 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
25qualifying 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
30group 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
35 (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) 40an 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
45redeemable, 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) 5It 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,

10is 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) 15a 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
20territory 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
25other 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
30CFC 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) 35If 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) 40If 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) 45at 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
50connected 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) 5a 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%
10subsidiary 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
15the 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
20“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
25the 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—

30

371ID The 75% exemption

(1) This section applies to a qualifying loan relationship if section 371IB
does 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
5section 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
10account 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
15leftover 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
20amounts 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—

(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) 35any 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
40of 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) 45in 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
5worldwide 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
10relationship 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.

15 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
  20is 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
25if the debits exceed the credits subtract the deficit from the step 1
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)
30from 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.

Step 4

35Allocate 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.

371IG What is a “qualifying loan relationship”?

(1) 40In 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) 5In 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.

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

(a) 10there 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
15(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)
20loan 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
25relationship 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) 30the 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
35business 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) 40is 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
45qualifying 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
5establishment, 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
10is 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) 15all 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
20relationship 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
25relation 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) 30the 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) 35A 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
40another person.

(6) A creditor relationship of the CFC cannot be a qualifying loan
relationship if—

(a) the loan which is the subject of the creditor relationship is
made to any extent out of funds received by the CFC (directly
45or indirectly) from a relevant UK connected company other
than by way of a loan, or

(b) the creditor relationship is connected (directly or indirectly)
to an arrangement which gives rise to a deduction in the
calculation of the profits of a trade of a relevant UK connected

company (apart from the ultimate debtor) for the purposes of
Part 3 of CTA 2009 (trading income).

(7) In subsection (6) “relevant UK connected company” means a UK
resident company connected with the CFC, the main business of
5which is banking business or insurance business.

(8) A creditor relationship of the CFC cannot be a qualifying loan
relationship if—

(a) the CFC receives relevant UK funds or other assets for the
purpose of funding the loan which is the subject of the CFC’s
10creditor relationship,

(b) the provision of the relevant UK funds or other assets is itself
funded (wholly or partly and directly or indirectly) by a loan
made to a UK connected company,

(c) the relevant loan is wholly or mainly used to repay wholly or
15partly another loan made to the ultimate debtor by a person
not connected with the ultimate debtor, and

(d) the events mentioned in paragraphs (a) to (c) take place
under, or are otherwise connected (directly or indirectly)
with, an arrangement the main purpose, or one of the main
20purposes, of which is to obtain a tax advantage for any
person.

(9) In subsection (8)—

(a) “relevant UK funds or other assets” and “UK connected
company” have the same meaning as in section 371EC, and

(b) 25in paragraph (c) “the relevant loan” means—

(i) the loan which is the subject of the CFC’s creditor
relationship, or

(ii) if the ultimate debtor is determined in accordance
with section 371IG (4) or (5), loan B.

(10) 30In subsections (4)(b) and (9)(b)(ii) references to loan B do not include
any part of loan B—

(a) which loan A is not made and used to fund, or

(b) in relation to which the requirement of section 371IG (3)(c) is
not met.

371II 35 Power to amend definitions

The HMRC Commissioners may by regulations amend this
Chapter—

(a) so as to amend the definition of “qualifying resources” for the
purposes of section 371IB, or

(b) 40so as to amend the definition of “qualifying loan
relationship” for the purposes of this Chapter (including by
way of amending the definition of “ultimate debtor”).

371IJ Claims

(1) A claim under this Chapter must be made by being included in
45company C’s company tax return for the relevant corporation tax
accounting period (as defined in section 371BC (3)).

(2) The claim may be included in the return originally made or by
amendment.

(3) A claim under this Chapter may be made, amended or withdrawn at
any time up to whichever is the last of the following dates—

(a) 5the first anniversary of the filing date for company C’s
company tax return of the relevant corporation tax
accounting period under paragraph 14 of Schedule 18 to FA
1998;

(b) if notice of enquiry is given into that return under paragraph
1024 of that Schedule, 30 days after the enquiry is completed;

(c) if after such an enquiry an officer of Revenue and Customs
amends the return under paragraph 34(2) of that Schedule, 30
days after notice of the amendment is issued;

(d) if an appeal is brought against such an assessment, 30 days
15after the date on which the appeal is finally determined.

(4) A claim under this Chapter may be made, amended or withdrawn at
a later time if an officer of Revenue and Customs allows it.

(5) In any event, if after a claim under this Chapter is made there is a
change of circumstances affecting the tested income amount or the
20tested expense amount mentioned in section 371IE (2), the claim may
be amended at any time within the period of 12 months after the
change of circumstances for the purpose of taking account of the
change of circumstances.

(6) The time limits otherwise applicable to amendment of a company tax
25return do not apply to an amendment to the extent that it makes,
amends or withdraws a claim under this Chapter within the time
allowed by or under this section.

(7) In subsection (3) references to an enquiry into a company tax return
do not include an enquiry restricted to a previous amendment
30making, amending or withdrawing a claim under this Chapter.

(8) An enquiry is so restricted if—

(a) the scope of the enquiry is limited as mentioned in paragraph
25(2) of Schedule 18 to FA 1998, and

(b) the amendment giving rise to the enquiry consisted of the
35making, amending or withdrawing of a claim under this
Chapter.

Chapter 10

The exempt period exemption

371JA Introduction to Chapter

(1) This Chapter sets out an exemption called “the exempt period
40exemption” for the purposes of section 371BA (2)(b).

(2) Section 371JE also provides for adjustments of profits which would
otherwise pass through the CFC charge gateway (see section
371BB (2)(b)) linked to the exempt period exemption.