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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: Introduction to the CFC Charge: Particular Entities: Companies which are participants in offshore funds

Corporate participants in offshore funds may in certain circumstances be excluded from the definition of a chargeable company at step 4 of TIOPA10/S371BC(1) (see INTM194400). This is because there can be difficulties in identifying when a UK resident company with an interest in an offshore fund is a chargeable company especially when its relevant interest is close to the 25% charge threshold set at section 371BD (see INTM194500). It is normal for an offshore fund to acquire and lose investors on a regular basis meaning that the proportionate holding of participants in the fund could fluctuate on a daily basis. This may cause problems in accurately monitoring an interest held by a UK resident company in an offshore fund that is a CFC. Section 371BF allows some leeway for participants monitoring their investment for the purpose of considering whether they meet the 25% relevant interest condition at section 371BD and thus are a chargeable company.

Section 371BF(1) deems that a company is not a chargeable company for the purposes of step 4 in section 371BC(1) if:

(a) The CFC is an offshore fund (as defined in TIOPA10/S355, for external users http://www.legislation.gov.uk/ukpga/2010/8/section/355),

(b) At the relevant time and at all subsequent relevant times, the company reasonably believes that the requirement at TIOPA10/S371BD(1) will not be met in relation to it (i.e. its relevant interest and those of connected persons and associates will be less than 25% of the CFC’s chargeable profits), and

(c) the meeting of that requirement in relation to the company is in no way attributable to any step:

(i) which was taken by the company or any person connected or associated with the company, and

(ii) which, at the time it was taken, could reasonably have been expected to cause that requirement to be met.

This means that where there is a CFC that is an offshore fund; providing that, at particular points during the accounting period, it is reasonable to believe that the UK resident company’s interest does not exceed the 25% relevant interest threshold set at section 371BD and providing that if the 25% relevant interest threshold were to be exceeded, the cause of exceeding the threshold is not directly attributable to the company or any persons connected or associated with the company, then the company will not be a chargeable company at step 4 of TIOPA10/S371BC(1).

For the purposes of (b) above, the relevant time is at the beginning of the accounting period or, if the company has no relevant interest in the offshore fund at the beginning of the accounting period, the time when the company first has a relevant interest during the accounting period. Any subsequent relevant time means any time during the accounting period at which there is an increase or some other change in the relevant interests of the company to which the section applies.

Example

On the 1 September 2013 a UK resident company invests £10 million into an offshore fund CFC. At the time that the investment is made information from the fund manager suggests that the value of the fund is approximately £50 million. The fund prospectus indicates an annual increase in investment into the fund arising from marketing to third parties of 20%. At the time that the investment is made (the relevant time) the information available suggests that it is reasonable for the UK resident company making the investment to believe that the condition at section 371BD(1) will not be met as they have a 20% relevant interest that is likely to proportionately decrease in future years.

The fund does not meet the levels of investment expected and, as a consequence of investors withdrawing money from the fund, by 31 December 2013 the fund has dropped in value to £39.8 million. Between 1 January and 31 March 2014 the fund fluctuates in value between £39 million and £41 million. The investment of £10 million will at times have exceeded 25% of the value of the fund and as a consequence caused the condition at section 371BD(1) to be met. However in these circumstances, with the sudden reduction in the value of the fund and the subsequent fluctuations in value, the investor may have believed that the condition at section 371BD(1) will have continued not to be met.

The presumption that it may be reasonable for the company to believe that the condition continued not to be met may differ if, during the period to 31 December 2013, the company or a connected person took a step that meant the condition at section 371BD(1) would be met. For example if a person connected with the company withdrew funds that caused the company’s share to exceed 25% of the value of the fund, then we would need to examine whether the company could have reasonably expected that this step would cause its share to exceed 25% of the value of the fund.