Finance Bill

Session 2012 - 13
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Finance Bill

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
454

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
5
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
10
(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.
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(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
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(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.
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(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
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(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—
35
(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—
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(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
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(iii)
the shares are issued to persons who are not members
of the CFC group.

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Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
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(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
5
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).
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(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
15
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
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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
25
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
30
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
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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
40
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
45
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.
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Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
456

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
5
(“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
10
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
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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”.
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(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;
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(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—

100% x B

A + B


where—
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A is the value of the consideration which is in the form of the
issue of shares by the parent member to the unconnected
persons, and
B is, as the case may be—
(a)
the value of the consideration which is not in the form
35
of the issue of shares by the parent member to the
unconnected persons,
(b)
the value of the extraordinary distribution, or
(c)
the total of the values given by paragraphs (a) and (b).
371ID
The 75% exemption
40
(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.

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies
457

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
5
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
10
(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.
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(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
20
account to exceed the tested expense amount for that period.
(4)
“Z%” is given by the following formula—

100% x E

1+ R


where—
E is the amount of the excess which would be caused by the
relevant amounts,

I is the amount of any increase in the tested income amount

which would be caused by the relevant amounts, and

R is the amount of any reduction in the tested expense amount

which would be caused by the relevant amounts.

(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).

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Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies

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(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—

(a)	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

(b)	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—

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Part 1 — Controlled foreign companies

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(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.

(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—

Finance Bill
Schedule 20 — Controlled foreign companies and foreign permanent establishments
Part 1 — Controlled foreign companies

460

(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.

(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

or 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