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Finance Bill (HC Bill 49)

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Determine the 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 (other
    than a qualifying loan relationship) entered into by the CFC
    5as 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
if the debits exceed the credits subtract the deficit from the step 1
10credits.

Step 3

Allocate to the qualifying loan relationship a just and reasonable
proportion of the credits from the CFC’s relevant debtor
relationships which are brought into account in determining the
15CFC’s non-trading finance profits (so far as not reflected in the step
2 credits).

Add the credits to the step 2 credits.

The result is “the step 3 credits”.

Step 4

20Allocate to the qualifying loan relationship a just and reasonable
proportion of the 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 (other
    than a qualifying loan relationship or a relevant debtor
    25relationship) entered into by the CFC as a hedge of risk in
    connection with a relevant debtor relationship, and

  • are attributable to the hedge of risk.

If the credits exceed the debits add the excess to the step 3 credits and
if the debits exceed the credits subtract the deficit from the step 3
30credits.

Step 5

Allocate to the qualifying loan relationship a just and reasonable
proportion of—

  • the debits from the CFC’s loan relationships which are
    35brought into account in determining the CFC’s non-trading
    finance profits (so far as not reflected in the step 4 credits),
    and

  • any amounts set off under Chapter 16 of Part 5 of CTA 2009
    (non-trading deficits) against amounts which, apart from the
    40set off, would be included in the CFC’s non-trading finance
    profits.

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371IG What is a “qualifying loan relationship”?

(1) In this Chapter “qualifying loan relationship” means a creditor
relationship of the CFC—

(a) the ultimate debtor in relation to which is a qualifying
5company, 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
10relationship.

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) 15loan 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
20B, 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
25Chapter 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
30loan 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
35banking 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 (as the case may be), and

(c) P is not a UK resident qualifying company.

(8) 40In 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) 45If the ultimate debtor in relation to a creditor relationship of the CFC
is a non-UK resident company, the creditor relationship cannot be a

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qualifying 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
5profits 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) 10If 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
15effect 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
20is 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) 25as 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
30are 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
35to 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
40relationship to provide (directly or indirectly) funding for—

(a) a loan to another person, or

(b) so far as not covered by paragraph (a), an arrangement
intended to produce for any person a return in relation to any
amount which it is reasonable to suppose would be a return
45by reference to the time value of that amount of money.

(6) Subsection (5) does not apply if—

(a) the main business of the ultimate debtor is banking business
or insurance business, and

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(b) the funding for the loan or arrangement would be provided
in the ordinary course of the ultimate debtor’s banking
business or insurance business (as the case may be).

(7) A creditor relationship of the CFC cannot be a qualifying loan
5relationship if—

(a) the main business of the ultimate debtor in relation to the
creditor relationship is banking business or insurance
business, and

(b) the creditor relationship is, or is connected (directly or
10indirectly) to, an arrangement the main purpose, or one of the
main purposes, of which is for the ultimate debtor to provide
(directly or indirectly) funding for a loan or arrangement as
mentioned in subsection (5)(a) or (b) in order to obtain a tax
advantage for the ultimate debtor.

(8) 15A creditor relationship of the CFC cannot be a qualifying loan
relationship if the loan which is the subject of the creditor
relationship is made to any extent (other than a negligible one) out of
funds received by the CFC (directly or indirectly)—

(a) from a relevant UK connected company other than by way of
20a loan, or

(b) as a result of 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).

(9) 25For the purposes of subsection (8) a company is “relevant UK
connected” if—

(a) the company is a UK resident company connected with the
CFC,

(b) the company’s main business is banking business or
30insurance business, and

(c) the company’s banking business or insurance business (as
the case may be) is a trade.

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

(a) 35the CFC receives relevant UK funds or other assets for the
purpose of funding the loan which is the subject of the CFC’s
creditor 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
40made to a UK connected company by—

(i) a non-UK resident person, or

(ii) a UK resident person who is not connected with the
CFC,

(c) the relevant loan is wholly or mainly used to repay wholly or
45partly 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

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purposes, of which is to obtain a tax advantage for any
person.

(11) In subsection (10)

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

(b) 5in 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.

(12) 10In subsections (4)(b) and (11)(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 15 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) 20so as to amend the definition of “qualifying loan
relationship” or “ultimate debtor” for the purposes of this
Chapter.

371IJ Claims

(1) A claim under this Chapter must be made by being included in
25company 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) The claim may be amended or withdrawn by company C only by
30amending the return.

(4) 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) the first anniversary of the filing date for company C’s
company tax return for the relevant corporation tax
35accounting period under paragraph 14 of Schedule 18 to FA
1998;

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

(c) if after such an enquiry an officer of Revenue and Customs
40amends 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 amendment, 30 days
after the date on which the appeal is finally determined.

(5) A claim under this Chapter may be made, amended or withdrawn at
45a later time if an officer of Revenue and Customs allows it.

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(6) 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
tested expense amount mentioned in section 371IE(2), the claim may
be amended at any time within the period of 12 months after the
5change of circumstances for the purpose of taking account of the
change of circumstances.

(7) The time limits otherwise applicable to amendment of a company tax
return do not apply to an amendment to the extent that it makes,
amends or withdraws a claim under this Chapter within the time
10allowed by or under this section.

(8) In subsection (4) references to an enquiry into a company tax return
do not include an enquiry restricted to a previous amendment
making, amending or withdrawing a claim under this Chapter.

(9) An enquiry is so restricted if—

(a) 15the 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
making, amending or withdrawing of a claim under this
Chapter.

Chapter 10

20The exempt period exemption

371JA Introduction to Chapter

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

(2) Section 371JE also provides for adjustments of profits which would
25otherwise pass through the CFC charge gateway (see section
371BB(2)(b)) linked to the exempt period exemption.

371JB The basic rule

(1) The exempt period exemption applies for a CFC’s accounting period
if—

(a) 30the accounting period ends during an exempt period of the
CFC (see sections 371JC and 371JD),

(b) the subsequent period condition is met, and

(c) the chargeable company condition is met.

(2) The subsequent period condition is met if—

(a) 35the CFC does not cease to be a CFC before having at least one
accounting period which begins after the end of the exempt
period, and

(b) section 371BC (charging the CFC charge) does not apply in
relation to the CFC’s first accounting period to begin after the
40end of the exempt period (see section 371BA(2)).

(3) The chargeable company condition is met if, at all times during the
relevant period—

(a) the charging condition in section 371JC is met, and

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(b) each company which would be a chargeable company for the
purposes of that condition is an original chargeable company
or is connected with an original chargeable company.

(4) In subsection (3)

  • 5“original chargeable company” means a company which, for
    the purposes of the charging condition in section 371JC,
    would be a chargeable company at the beginning of the
    exempt period, and

  • “the relevant period” means the period which—

    (a)

    10begins immediately after the beginning of the exempt
    period, and

    (b)

    ends at the end of the CFC’s first accounting period to
    begin after the end of the exempt period.

(5) This section is subject to section 371JF (anti-avoidance).

371JC 15 When does an exempt period begin?

(1) An exempt period of a CFC begins at any time (“the relevant time”)
during an accounting period of the CFC if—

(a) the initial condition is met,

(b) the charging condition is met at the relevant time, and

(c) 20at no time during the relevant preceding period (if there is
one) is the charging condition met.

(2) The initial condition is met if—

(a) immediately before the relevant time, the company (“C”)
which is the CFC is carrying on a business, or

(b) 25if the relevant time is the time at which C is incorporated or
formed, C is incorporated or formed by one or more persons
for the purpose of controlling one or more companies in
circumstances where it is expected that an exempt period will
begin in relation to one or more of those companies when C
30begins to control the company or companies.

(3) To determine if the charging condition is met at any time, assume—

(a) that the company which is the CFC is a CFC at the time in
question if that is not otherwise the case,

(b) that the time in question is itself an accounting period of the
35CFC, and

(c) that section 371BC (charging the CFC charge) applies in
relation to the assumed accounting period.

(4) The charging condition is met at the time in question if, as a result of
steps 1, 3 and 4 in section 371BC(1), there would be one or more
40chargeable companies in relation to the assumed accounting period.

(5) “The relevant preceding period” means the period of 12 months
ending immediately before the relevant time, excluding any part of
that period during which the company which is the CFC does not
exist.

371JD 45 How long is an exempt period?

(1) Subject to what follows, an exempt period of a CFC lasts 12 months.

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(2) Subsection (3) applies if a notice is given to an officer of Revenue and
Customs requesting that the length of an exempt period of a CFC be
extended (or further extended).

(3) An officer of Revenue and Customs may extend (or further extend)
5the length of the exempt period.

(4) A notice under subsection (2) must be given no later than the end of
the exempt period (as it stands at the time the notice is given).

(5) A notice under subsection (2) may be given only by a company
which, at the time the notice is given, would be a chargeable
10company for the purposes of the charging condition in section 371JC.

371JE Adjustment of profits passing through the CFC charge gateway

(1) This section applies for a CFC’s accounting period if—

(a) the accounting period begins, but does not end, during an
exempt period of the CFC, and

(b) 15the subsequent period condition and the chargeable
company condition in section 371JB are both met.

(2) The CFC’s assumed total profits which would otherwise pass
through the CFC charge gateway are to be adjusted to ensure that no
profits which arise in the exempt period, as determined on a just and
20reasonable basis, pass through the CFC charge gateway.

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

371JF Anti-avoidance

(1) The exempt period exemption does not apply for a CFC’s accounting
period (“the relevant accounting period”) if condition A or B is met.

(2) 25Condition A is that—

(a) an arrangement is entered into at any time,

(b) the main purpose, or one of the main purposes, of the
arrangement is to secure a tax advantage for any person,

(c) the arrangement is linked to the exempt period exemption
30applying or being expected to apply (apart from this
section)—

(i) for the relevant accounting period, or

(ii) for that period and one or more other accounting
periods of the CFC, and

(d) 35the arrangement involves one or both of the following—

(i) the CFC holding assets which give rise to non-trading
finance profits or trading finance profits of the CFC,
or

(ii) the CFC holding intellectual property which gives
40rise to any income of the CFC.

(3) Condition B is that—

(a) an arrangement is entered into at any time,

(b) in consequence of the arrangement, the length of any
accounting period of the CFC is less than 12 months, and

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(c) the main purpose, or one of the main purposes, of the
arrangement is to secure that the exempt period exemption
applies—

(i) for the relevant accounting period, or

(ii) 5for that period and one or more other accounting
periods of the CFC.

(4) In this section references to the exempt period exemption include
references to section 371JE.

371JG Amendment of company tax returns

(1) 10This section applies in relation to a company’s company tax return
for a corporation tax accounting period if an exempt period of a CFC
falls (wholly or partly) in the corporation tax accounting period.

(2) Any amendment of the return which relates to the application (or
non-application) of the exempt period exemption or section 371JE for
15an accounting period of the CFC may be made by the company at
any time no later than 12 months after the relevant filing date.

(3) “The relevant filing date” means the date which is the filing date
under paragraph 14 of Schedule 18 to FA 1998 for the company’s
company tax return for its corporation tax accounting period in
20which ends the CFC’s first accounting period to begin after the end
of the exempt period.

(4) “Corporation tax accounting period” means an accounting period for
corporation tax purposes.

Chapter 11

The excluded territories exemption

371KA 25 Introduction to Chapter

This Chapter sets out an exemption called “the excluded territories
exemption” for the purposes of section 371BA(2)(b).

371KB The basic rule

(1) The excluded territories exemption applies for a CFC’s accounting
30period if—

(a) the CFC is resident (see section 371KC) in an excluded
territory for the accounting period,

(b) the total of the following amounts is no more than the
threshold amount for the accounting period (see section
35371KD)—

(i) the CFC’s category A income (if any) for the
accounting period (see sections 371KE and 371KF),

(ii) the CFC’s category B income (if any) for the
accounting period (see section 371KG),

(iii) 40the CFC’s category C income (if any) for the
accounting period (see section 371KH), and

(iv) the CFC’s category D income (if any) for the
accounting period (see section 371KI),

(c) the IP condition is met (see section 371KJ), and

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(d) the CFC is not, at any time during the accounting period,
involved in an arrangement the main purpose, or one of the
main purposes, of which is to obtain a tax advantage for any
person.

(2) 5In this Chapter “excluded territory” means a territory specified as
such in regulations made by the HMRC Commissioners.

(3) The HMRC Commissioners may also by regulations, in relation to
CFCs resident in a specified excluded territory or to other specified
cases, do one or more of the following—

(a) 10provide that one or both of the requirements set out in
subsection (1)(b) and (c) does not have to be met in order for
the excluded territories exemption to apply;

(b) modify one or both of those requirements, including by
modifying any provision of this Chapter mentioned in
15subsection (1)(b) or (c);

(c) specify further requirements which must be met in order for
the excluded territories exemption to apply.

(4) If an amount is included in more than one of the categories of income
mentioned in subsection (1)(b)(i) to (iv), the amount is to be counted
20only once in determining if the threshold amount is exceeded.

371KC How to determine the territory in which a CFC is resident

(1) For the purposes of this Chapter the territory in which a CFC is
resident for an accounting period is to be determined in accordance
with this section; and in this Chapter “the CFC’s territory” means
25that territory as so determined.

(2) The CFC is taken to be resident in the territory determined in
accordance with section 371TA.

(3) But section 371TA(1)(b) is to be applied only if, at all times during the
accounting period, the CFC or persons with interests in the CFC are
30liable under the law of the territory in question to tax on the CFC’s
income.

(4) If, as a result of subsection (3), no territory of residence can be
determined, the excluded territories exemption cannot apply for the
accounting period.

371KD 35 What is “the threshold amount”?

(1) The threshold amount for a CFC’s accounting period is—

(a) 10% of the CFC’s accounting profits for the accounting
period, or

(b) if more, £50,000.

(2) 40If the accounting period is less than 12 months, the amount specified
in subsection (1)(b) is to be reduced proportionately.

(3) In this Chapter references to a CFC’s accounting profits for an
accounting period are to be read ignoring section 371VD(7) and (8).