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Corporation Tax Bill


Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups

303

 

(2)   

The amount which is to be brought into account by the transferor in respect

of—

(a)   

the transaction mentioned in that section, or

(b)   

the series of transactions mentioned in that section taken together,

   

is the fair value of the derivative contract as at the date of transfer to the

5

transferee.

(3)   

For any accounting period in which the transferee is a party to the contract, for

the purpose of determining the credits and debits to be brought into account in

respect of the contract in accordance with this Part, the transferee is treated as

if it had acquired the contract for consideration of an amount equal to the fair

10

value of the contract as at the date of transfer to it.

(4)   

If a discount arises in respect of the transaction or series of transactions, the

amount to be brought into account under subsection (2) is increased by the

amount of the discount.

(5)   

In this section—

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“discount” has the same meaning as in section 480 (relevant non-lending

relationships involving discounts), and

“the transferor” and “the transferee” have the same meaning as in section

625.

629     

         Tax avoidance

20

(1)   

Section 625 does not apply if conditions A and B are met.

(2)   

Condition A is that the transferor is a party to arrangements in accordance with

which there is likely to be a transfer of rights or liabilities under the derivative

contract by the transferee to another person in circumstances in which section

625 would not apply.

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(3)   

Condition B is that the purpose or one of the main purposes of the

arrangements is to secure a tax advantage for the transferor or a person

connected with it.

(4)   

Section 625 does not apply in relation to a disposal if section 698 (disposals for

consideration not fully recognised by accounting practice) applies in relation

30

to the disposal.

(5)   

In this section—

“arrangements” includes any scheme, agreement, understanding,

transaction or series of transactions,

“tax advantage” has the meaning given by section 840ZA of ICTA,

35

“transfer” includes any arrangement which equates in substance to a

transfer (including any acquisition or disposal of, or increase or

decrease in, a share of the profits or assets of a firm), and

“the transferor” and “the transferee” have the same meaning as in section

625.

40

Transferee leaving group after replacing transferor as party to derivative contract

630     

Introduction to sections 631 and 632

(1)   

Sections 631 and 632 apply if—

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups

304

 

(a)   

section 625 (group member replacing another as party to derivative

contract) applies because of a transaction or series of transactions

within section 626(2) or (3), and

(b)   

before the end of the relevant 6 year period and while still a party to the

relevant derivative contract, the transferee ceases to be a member of the

5

relevant group.

(2)   

But the transferee is not to be treated for the purposes of this section and

sections 631 and 632 as having left the relevant group if—

(a)   

rights and liabilities under a derivative contract are transferred in the

course of a transfer or merger in relation to which Chapter 9 (European

10

cross-border transfers of business) or Chapter 10 (European cross-

border mergers) applies, and

(b)   

the transferee ceases to be a member of the relevant group in

consequence of the transfer or merger.

(3)   

In a case where subsection (2) applies, if the transferee becomes a member of

15

another group in consequence of the transfer or merger, it is to be treated for

the purposes of this section and sections 631 and 632 as if the relevant group

and the other group were the same.

(4)   

In this section and sections 631 and 632

“the relevant 6 year period” means the period of 6 years following—

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(a)   

in a case where section 625 applies because of a transaction

within section 626(2) (“case A”), that transaction, or

(b)   

in a case where section 625 applies because of a series of

transactions within section 626(3) (“case B”), the last transaction

of that series,

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“the relevant derivative contract” means the derivative contract

mentioned in section 625(1),

“the relevant group” means—

(a)   

in case A, the group mentioned in section 626(2),

(b)   

in case B, the group mentioned in section 626(3), and

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“the transferee” has the same meaning as in section 625.

631     

Transferee leaving group otherwise than because of exempt distribution

(1)   

This section applies if—

(a)   

the transferee ceases to be a member of the relevant group, and

(b)   

it does not so cease just because of a distribution which is exempt as a

35

result of—

(i)   

section 213(2) of ICTA (exempt distributions), or

(ii)   

section 213A of ICTA (exempt distributions: division of

business).

(2)   

If condition A or B is met, this Part applies as if—

40

(a)   

the transferee had assigned its rights and liabilities under the relevant

derivative contract immediately before so ceasing,

(b)   

the assignment had been for consideration of an amount equal to their

fair value at that time, and

(c)   

the transferee had immediately reacquired them for consideration of

45

the same amount.

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups

305

 

(3)   

Condition A is that if subsection (2) applied a credit would be brought into

account in accordance with this Part by the transferee because of subsection

(2)(a) and (b).

(4)   

Condition B is that—

(a)   

the transferee has a hedging relationship between the relevant

5

derivative contract and a creditor relationship, and

(b)   

because of section 345(2)(a) and (b) (transferee leaving group otherwise

than because of exempt distribution) a credit is to be brought into

account by the transferee for the purposes of Part 5 (loan relationships)

in respect of the creditor relationship.

10

632     

Transferee leaving group because of exempt distribution

(1)   

This section applies if—

(a)   

the transferee ceases to be a member of the relevant group just because

of a distribution which is exempt as a result of—

(i)   

section 213(2) of ICTA (exempt distributions), or

15

(ii)   

section 213A of ICTA (exempt distributions: division of

business), and

(b)   

there is a chargeable payment within the meaning of section 214(2) of

that Act (chargeable payments connected with exempt distributions)

within 5 years after the making of the distribution.

20

(2)   

If condition A or B is met, this Part applies as if—

(a)   

the transferee had assigned its rights and liabilities under the relevant

derivative contract immediately before that chargeable payment was

made,

(b)   

the assignment had been for consideration of an amount equal to their

25

fair value immediately before the transferee ceased to be a member of

the relevant group, and

(c)   

the transferee had immediately reacquired them for consideration of

the same amount.

(3)   

Condition A is that if subsection (2) applied a credit would be brought into

30

account in accordance with this Part by the transferee because of subsection

(2)(a) and (b).

(4)   

Condition B is that—

(a)   

the transferee has a hedging relationship between the relevant

derivative contract and a creditor relationship, and

35

(b)   

because of section 346(2)(a) and (b) (transferee leaving group because

of exempt distribution) a credit is to be brought into account by the

transferee for the purposes of Part 5 (loan relationships) in respect of

the creditor relationship.

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 6 — Special kinds of company

306

 

Chapter 6

Special kinds of company

Mutual trading companies

633     

Mutual trading companies

For the purposes of this Part, activities carried on by a company in the course

5

of any mutual trading are treated as not constituting the whole or any part of

a trade.

Insurance companies

634     

Insurance companies

For the purposes of this Part, activities carried on by a company in the course

10

of—

(a)   

any mutual insurance or other mutual business which is not life

assurance business, or

(b)   

any basic life assurance and general annuity business,

are treated as not constituting the whole or any part of a trade.

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635     

Creditor relationships: embedded derivatives which are options

(1)   

This section applies if in any accounting period—

(a)   

a company is a party to a creditor relationship for the purposes of its life

assurance business, and

(b)   

that creditor relationship is one in relation to which sections 415 and

20

585 (which both apply to loan relationships with embedded

derivatives) would have effect but for the fact that the company

accounts for the creditor relationship at fair value through profit and

loss.

(2)   

This Part and Part 5 (loan relationships) have effect for that accounting period

25

as they would if the creditor relationship were one in relation to which those

sections have effect.

636     

Modifications of Chapter 5

(1)   

Chapter 5 (continuity of treatment on transfers within groups) has effect in

relation to insurance companies with the following modifications.

30

(2)   

Section 625(1)(a) (which sets out one of the conditions for that section to apply)

has effect as if for “section 626(2)” there were substituted “section 626(2), (2A)

or (2B)”.

(3)   

Section 626 (transactions to which section 625 applies) has effect as if after

subsection (2) there were inserted—

35

“(2A)   

A transaction is within this subsection if it is a transfer between two

companies of business consisting of the effecting or carrying out of

contracts of long-term insurance which has effect under an insurance

business transfer scheme.

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 6 — Special kinds of company

307

 

(2B)   

A transaction is within this subsection if it is a transfer between two

companies which is a qualifying overseas transfer.”

(4)   

Section 625 (group member replacing another as party to derivative contract)

does not apply as a result of a transaction or series of transactions within

section 626(2) or (3) in relation to a transfer of an asset, or of rights or duties

5

under or an interest in an asset, if the asset was within one of the categories set

out in section 440(4)(a), (d) and (e) of ICTA (assets held for certain categories of

long-term business)—

(a)   

immediately before the transfer, or

(b)   

immediately after it.

10

(5)   

Section 625 does not apply as a result of a transaction within section 626(2A) or

(2B) in relation to a transfer of an asset, or of rights or duties under or an

interest in an asset, if the asset—

(a)   

was within one of the categories set out in section 440(4) of ICTA

(transfer of assets etc) immediately before the transfer, and

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(b)   

is not within that category immediately after it.

(6)   

Subsection (7) applies for the purposes of subsection (5) if one of the companies

is an overseas life insurance company.

(7)   

An asset is taken to be within the same category both immediately before the

transfer and immediately after it if the asset—

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(a)   

was within one category immediately before the transfer, and

(b)   

is within the corresponding category immediately after it.

Investment and venture capital trusts

637     

Investment trusts: profits or losses of a capital nature

(1)   

Profits or losses of a capital nature arising to an investment trust from a

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derivative contract may not be brought into account as credits or debits in

accordance with this Part.

(2)   

For the purposes of this section, “profits or losses of a capital nature” means

profits or losses which—

(a)   

are accounted for through the capital column of the income statement

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in accordance with the Statement of Recommended Practice, or

(b)   

would have been so accounted for if that Statement had been applied

correctly.

(3)   

“The Statement of Recommended Practice”, in relation to an accounting period

for which it is required or permitted to be used, means—

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(a)   

the Statement of Recommended Practice relating to Investment Trust

Companies, issued by the Association of Investment Trust Companies

in January 2003, as from time to time modified, amended or revised, or

(b)   

any subsequent Statement of Recommended Practice relating to

investment trusts, as from time to time modified, amended or revised.

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(4)   

The Treasury may by order amend the definition of “profits or losses of a

capital nature” in subsection (2), so far as it applies in relation to an investment

trust which prepares accounts in accordance with international accounting

standards.

 
 

 
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