Derivative contracts: group continuity: conditions
When does CTA09/S625 apply?
CTA09/S626 applies the rule in CTA09/S625 where
- there is a ‘related transaction’ between two companies in the same ‘group’, who are both ‘within the charge to corporation tax’, and
- as a result one of the companies (the transferee) ‘directly or indirectly replaces’ the other (the transferor) as party to a derivative contract.
It also applies where the derivative contract does not pass directly from transferor to transferee, but proceeds through a ‘series of transactions’.
Related transaction takes its meaning from CTA09/S596. It includes any case where there is disposal or acquisition (in whole or in part) of rights under a derivative contract as a result of a transfer by sale or gift.
Group, for this purpose, takes its meaning from TCGA92/S170 (CTA09/S624(3)). See CG45100 for more on this. In broad summary, a principal company and its 75% subsidiaries, and all of their 75% subsidiaries, and so on, form a group. But a subsidiary can only be a member of the group if the principal company is entitled, directly or indirectly, to more than 50% of the profits and assets of the company.
The application of the group continuity rule does not depend on the relationship between the parties to the derivative contract itself. What is important is whether the transferor and transferee are members of the same group.
Within the charge to corporation tax
The group continuity rule is a computational provision that determines the credits and debits to be brought into account by two companies, the transferor and the transferee. It is therefore only capable of application where both companies are within the derivatives contracts rules. For the avoidance of doubt, CTA09/S626(3)(b) specifies that both companies must be within the charge to corporation tax in respect of the related transaction. This means that the rule cannot apply to a transaction where one company is both not resident in the UK and entirely outside the scope of CT. Nor will it apply in cases where derivative contracts credits or debits are exempt from tax in the hands of the transferor or transferee (for example, if the exemption for charities applies, or if the derivative is transferred into the tax-exempt business of a UK-REIT).
Directly or indirectly replaces
This is covered at CFM53030.
Series of transactions
This provision addresses a different scenario from ‘indirect replacement’ - see CFM53040.