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HMRC internal manual

Corporate Finance Manual

Derivative contracts: group continuity: deemed assignment when company ceases to be resident


If an in-the-money derivative contract is transferred between two group companies, and CTA09/S625 applies, its effect will be that the accounting profit shown by the transferor company is not brought into account for tax purposes. The normal operation of the rules ensures that this ‘deferred’ profit is brought into account when the contract terminates, or there is a disposal outside the group. But various avoidance schemes have sought to exploit the mismatch between the accounts and the tax position by contriving that the ‘deferred’ profit is never brought into account by the group.

One scheme involved the transferee company changing the place of its central control and management, so that it ceased to be resident in the UK. The company then disposed of the contract while it was non-resident.

CTA09/S609 (originally introduced by FA 2004) counters avoidance of this nature, although it applies to all derivative contracts held by a company that ceases to be resident in the UK - there is no requirement that they should have previously been transferred between group companies. It applies where the company migrates on or after 17 March 2004.

When the company ceases to be UK resident at any time (‘the relevant time’), the derivatives contracts rules apply as if it had disposed of all its derivative contracts at their fair value at the relevant time, and immediately reacquired them at the same value. The deemed disposal is therefore treated as a related transaction for the purposes of Part 7 CTA09, and credits or debits are brought into account under the normal rules.

CTA09/S609 operates even-handedly - the result of the deemed disposal may be a profit or a loss. If, however, the main purpose of the company migration is a tax avoidance purpose, the unallowable purposes provision at CTA09/PT7/CH11 may operate to wholly or partially disallow debits arising from the related transaction.

CTA09/S610 applies the same rule if a derivative contract is held for the purposes of a UK permanent establishment (PE) of a non-resident company, and is transferred to or appropriated by a non-UK part of the company, without the transfer involving a normal related transaction.