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HMRC internal manual

International Manual

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Controlled Foreign Companies: Introduction to the CFC Charge: Particular Entities: Companies holding shares as trading assets

There may be occasions where a holding of shares in a CFC is effectively taxed in the hands of the chargeable company other than through a CFC charge. This may occur where a chargeable company holds an interest in the CFC through the holding of shares and those shares are held as trading assets. In these circumstances the movement in the value of the assets will be reflected in the UK taxable profit computation of the company holding the shares. It follows that the profits of the CFC that are reflected in the value of the shares will have been exposed to corporation tax.

TIOPA10/S371BG reduces a CFC charge to reflect the extent to which the profits of the CFC are exposed to corporation tax by modifying the application of step 5 of section 371BC(1) (see INTM194400) in these circumstances so that the chargeable profits and creditable tax (P% and Q%) arising from the relevant interest attributable to the holding of shares held as trading assets are left out of the CFC charge.

To qualify for this treatment the relevant interest (or part of a relevant interest) will need to have been held by a chargeable company at all times during the accounting period and the following conditions will need to have been met:

  • Condition A - the relevant interest (or part of a relevant interest) is held by the chargeable company by virtue of holding shares (referred to as the “relevant shares”) in the CFC either directly or indirectly at all times during the CFC’s accounting period;
  • Condition B is that any increase in the value of the shares mentioned in Condition A is brought into account in determining the income of the chargeable company for corporation tax purposes for the relevant corporation tax accounting period;
  • Condition C is that any dividend or other distribution received by the chargeable company directly or indirectly from the shares mentioned in Condition A is brought into account in determining its income for corporation tax purposes for the relevant corporation tax accounting period.

Where a chargeable company has a relevant interest in a CFC that falls within the definition of a bond fund, the movement in the value of the holding in the CFC will be reflected as a loan relationship credit in the hands of the relevant interest holder. Where this occurs TIOPA10/S371BG(7) and (8) provide that Conditions B and C are taken to be met if:

  • The chargeable company has the relevant interest mentioned in Condition A only by virtue of TIOPA10/S371OB(3) (an interest held by an open-ended investment company) or TIOPA10/S371OB(4) (an interest held by the trustees of an authorised unit trust);(see INTM227500)
  • The CFC is an offshore fund (within the definition of TIOPA10/S355, for external users http://www.legislation.gov.uk/ukpga/2010/8/section/355 that does not meet the qualifying investments test in CTA09/S493 (i.e. it is a ‘bond fund’); and
  • Conditions B and C would be met if the offshore fund met the qualifying investments test.

TIOPA10/S371BG is subject to TIOPA10/S371BH (companies carrying on basic life assurance and general annuity business (“BLAGAB”)).(see INTM194800) The effect of the special rules for taxing life insurance companies is that non- BLAGAB business is taxed on a trading basis and TIOPA10/S371BG will therefore potentially be in point. BLAGAB business, by contrast, is taxed on an I-E basis. TIOPA10/S371BH adjusts therefore the CFC charge at step 5 in a specific way for BLAGAB business. The effect is to exclude any amounts falling within section 371BG that relate to a chargeable company carrying on BLAGAB business as a shareholder but leave in charge amounts representing the policyholders’ share of the BLAGAB component of the apportioned chargeable profits.