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HMRC internal manual

Corporate Finance Manual

Debt cap: interaction with other rules: controlled foreign companies: accounting periods beginning before 1 January 2013

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Finance expenses paid to controlled foreign companies (CFCs)

The financing expense amounts of a relevant group company as defined in TIOPA10/S313 will include any interest or other relevant amounts paid directly or indirectly to CFCs as defined in Part XVII, Chapter IV ICTA 1988. These amounts will be included in the computation of the tested expense amount and form part of the total disallowed amount allocated to relevant group companies in the statement of allocated disallowances made under Chapter 3.

Amounts representing these finance expense amounts may still be effectively taxed in the UK on members of the worldwide group through apportionment under ICTA88/S747(3) where the relevant conditions in the CFC legislation are met.

To avoid the potential for effective double taxation, the CFC rules now contain provision at ICTA88/S751AA to reduce the amount of a CFC apportionment made under ICTA88/S747(3).

ICTA88/S751AA applies where an apportionment is to be made under section 747(3) and

  • the chargeable profits of the CFC contain an amount of income in respect of payment made by another company, and;
  • the amount brought into account for corporation tax purposes by the payer is reduced by the rules in TIOPA10/PT7/CH3.

It allows the UK company to which the profits are to be apportioned to apply to the Commissioners for HMRC for a reduction in the chargeable profits of the CFC. If the Commissioners grant the application those profits are treated as reduced by the specified amount and the CFC’s creditable tax is accordingly reduced on a just and reasonable basis.

The application should be made in writing to the CCM of the group who will be responsible for consulting CTIAA before there is a final agreement of any adjustment. The application should include the following:-

  • The statement of allocated disallowance;
  • The statement of allocated exemptions;
  • The unique taxpayer reference for each company listed in the statement (if not already included);
  • The name of the CFC;
  • The UK company’s interest in the CFC’s share and loan capital per ICTA88/S749B;
  • Tax district and unique taxpayer references of the UK interest holders where known;
  • Territory of residence of the CFC and details of branches in the UK;
  • The place, and for new companies, the date of incorporation of the CFC;
  • A copy of the most recent accounts of the CFC (or where these have not yet been drawn up, management accounts or financial projections);
  • Actual or expected equity at the beginning and end of the CFC’s accounting period;
  • Details of all direct or indirect transactions between the UK and the CFC - this should include interest on loans (direct or indirect), royalties, payments for services, purchase or sale of goods etc;
  • A computation of the CFC’s chargeable profits and creditable tax for the relevant accounting period;
  • A computation of the specified amount by which the chargeable profits for the relevant accounting period should be reduced;
  • A computation of the relevant amount by which it is just and reasonable that the chargeable profits should be treated as reduced and an explanation as to why that amount is considered to be just and reasonable;
  • A computation of the amount by which the creditable tax of the CFC for the relevant period should be reduced;
  • Where a company has delivered a tax return for the relevant accounting periods and the statement or revised statement means that there is a change in the amount of profit chargeable to corporation tax for the period or that other information on the return is incorrect, details of the change or information.