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HMRC internal manual

International Manual

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Controlled Foreign Companies: The CFC Charge Gateway Chapter 3 - Determining which (if any) of Chapters 4 to 8 apply: Does Chapter 5 apply?: What is excluded from non-trading finance profits?: contents

INTM197760 - What is excluded from non-trading finance profits?: Incidental non-trading finance profits - the 5% rule

INTM197770 - What is excluded from non-trading finance profits?: Incidental non-trading finance profits - the further 5% rule

INTM197780 - What is excluded from non-trading finance profits?: Example 1

INTM197790 - What is excluded from non-trading finance profits?: Example 2

INTM197800 - What is excluded from non-trading finance profits?: Example 3

INTM197810 - What is excluded from non-trading finance profits?: Example 4

What is excluded from non-trading finance profits? (TIOPA10/S371CB(3) and TIOPA10/S317CB(4))

If a CFC carries on a trade, and no trading profits for the accounting period pass through the CFC charge gateway (see INTM194300), profits which arise from the investment of funds held for the purposes of that trade are excluded. In effect such profits are treated as ancillary to the trade and their CFC status (whether within the scope of the CFC regime or not) depends on the status of the main trading profit.

Profits which arise from the investment of funds held by the CFC for the purposes of its UK or overseas property business are also excluded.

However, both of these exclusions are subject to further criteria to restrict their potential misuse. Those exclusions will not apply to non-trading finance profits arising from:

Funds held because of a prohibition or restriction on the payment of dividends imposed under the law of the CFC’s territory of incorporation.

Upstream loans to the UK are often put in place in lieu of payment of a dividend and profits arising on these loans should not benefit from full exemption under the incidental exclusion which is targeted at non-trading finance profits incidental to trading activity. However, where there is a temporary prohibition or restriction on a CFC paying a distribution such that the funds are still held with a view to making a distribution within 12 months of the end of the accounting period, then the profits arising from the funds may still be excluded from non-trading finance profits.

Funds held with a view to paying dividends or other distributions at a time after the relevant 12 month period.

Groups that roll up funds to defer or indefinitely delay payment of a dividend will not be able to benefit from the incidental exclusion. Groups that pursue an annual dividend policy and put the relevant funds on deposit pending an Annual General Meeting or other meeting at which the dividend is declared will (as long as this is within 12 months of the relevant accounting period).

Funds held with a view to acquiring shares in any company, or making a capital contribution of some other type.

This is because the incidental profits exclusion is meant for funds retained for working capital requirements and not for long term capital investments.

Funds held with a view to investing in land at a time after the relevant 12 month period.

Land, for these purposes, takes its definition from Schedule 1 of the Interpretation Act 1978 so that it includes buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land. It is felt that 12 months is a sufficiently long period for a new property to be identified or, if not, it is likely that the funds would be distributed to be used more effectively elsewhere in the group. However, this condition is not intended to apply to funds retained for specific repair or maintenance programmes in relation to land and property already owned by the CFC.

Funds held only or mainly for contingencies.

A contingency is felt to be too vague in terms of timescale so that it could cause profits to be rolled up for extended periods of time and it is not the objective of the incidental exclusion to shelter such profits.

Funds held only or mainly in order to reduce or eliminate a tax or duty imposed by any territory.

The incidental exclusion is not intended to cover funds retained, for example, because of a withholding tax on dividends. However, the condition refers specifically to the reduction or elimination of tax or duty. It is not intended to target the retention of funds in order to meet a tax or duty liability - for example, the temporary retention of funds to cover payroll taxes.

The relevant period.

The relevant period is defined in TIOPA10/S371CB as being 12 months after the end of the accounting period.

In all of the above circumstances the non-trade finance profits will remain within the scope of the CFC charge unless another exemption applies.

The interaction of a Chapter 9 claim with Chapters 3 and 5

Where a chargeable company makes a claim under Chapter 9 (exemptions for profits from qualifying loan relationships) its qualifying loan relationship profits are excluded from the references to non-trading finance profits in Chapter 3 and in Chapter 5. It is not possible to have some non-trading finance profits arising on qualifying loan relationships passing through into Chapter 5 and others subject to a claim under Chapter 9. However, a CFC’s qualifying loan relationship profits similarly exclude non-trading finance profits arising from the investment of funds held for the purposes of a trade that has no chargeable profits, or the investment of funds held by the CFC for the purposes of its UK or overseas property business.