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Finance BillPage 440

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
5CFC—

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

(b) did 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) 10As well as applying to each asset and risk separately, subsection (2)
must also apply to all the assets and risks included in the total
number 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
15an asset or risk included in the relevant assets and risks if amount A
is no more than 50% of amount B.

(2) Amount 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
20income which would not have become receivable during the
accounting period had the CFC—

(i) not held the asset, or

(ii) not borne the risk,

so far as it would be attributed to the permanent
25establishment 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) not held the asset, or

(ii) not borne the risk,

30so 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
expenses or transfers to or from reserves) of the CFC’s
income which would not have become receivable during the
35accounting 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) the additional expenses which the CFC would have incurred
during the accounting period had the CFC—

(i) 40not 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
number 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
45those assets or risks separately.

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(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 Exclusion: economic value

(1) Subsection (2) applies if—

(a) 5an 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
wholly or partly UK SPFs as determined at step 4 in section
371DB(1), and

(c) 10as 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
if—

(a) the net economic value to the CFC group which results from
15the 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
connected with the CFC, and

(b) the relevant non-tax value is a substantial proportion of the
20excess 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
liability of any person to tax or duty imposed under the law of any
territory outside the United Kingdom.

(4) 25“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) Subsection (6) applies if—

(a) 30there 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) it is not reasonably practicable to separate those assets or
35risks 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) In subsections (1) and (2) references to an asset or risk are to be read
40as 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) the SPFs which are relevant to the economic ownership of the
45asset, or the assumption and management of the risk, are
wholly or partly UK SPFs as determined at step 4 in section
371DB(1),

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(c) as a result of that determination, an amount is included in the
provisional 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
5companies.

(2) The amount is to be excluded from the provisional Chapter 4 profits
if 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
10the CFC which—

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

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

(3) 15Subsection (4) 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) 20it 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.

(4) 25In 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) 30the business premises condition (see section 371DG),

(b) the 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) 35Trading profits are also to be excluded from the provisional Chapter
4 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) 40This section applies for the purposes of section 371DF(1)(a).

(2) The 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
45reasonable degree of permanence, and

Finance BillPage 443

(b) from 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) 5a mine, an oil or gas well, a quarry or other place of extraction
of 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 10 Exclusion: trading profits (income condition)

(1) This 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) 15UK permanent establishments of non-UK resident
companies.

(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
20territory in which it is resident for the accounting period.

(4) Subsection (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.

(5) 25The 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) UK resident persons, or

(b) 30UK 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
35deriving (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
40account 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).

Finance BillPage 444

(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
5following 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) 10expenditure 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) 15expenditure 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
20company’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
25relevant 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 members of staff or
30other individuals who carry 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) 35This 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) 40Subsection (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
45assets 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.

Finance BillPage 445

(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
5is 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
10and 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) 15Subsections (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) 20the 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
25persons 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
30the 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) 35if 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
40subsection (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) 45In 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—

Finance BillPage 446

(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) 5the 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) 10This 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 15 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
20together),

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
25together).

(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) 30the 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
35in 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
40finance profits so far as they fall within any of sections 371EB to
371EE.

Finance BillPage 447

(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) 5To 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
10would 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) 15Subsection (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) 20it 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
25what 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 represent, or derive (directly or
indirectly) from, any capital contribution to the CFC made
30(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
35relation 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
40profits 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
45(directly or indirectly) from a UK connected
company, and

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

Finance BillPage 448

(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) 5UK 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) 10Non-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) 15with 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) 20it 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) 25that 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) 30Non-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) 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 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
45that 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 BillPage 449

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
5CFC charge gateway).

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

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
10were it a company which is not the 51% subsidiary of any other
company.

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.

15Determine 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.

Step 3

20If no excesses are determined at steps 1 and 2, no profits fall within
this Chapter.

(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
25CFC’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 sections 371FB and 371FC and
subsection (3) is also subject to subsection (6).

(5) 30Subsection (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,

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