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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: Introduction

Non-trading finance profits fall to be considered within Chapter 5 when a CFC has non-trading finance profits that are not otherwise excluded by Chapter 3. Chapter 3 excludes non-trading finance profits that are incidental to the exempt business activity of the CFC from the application of Chapter 5 either through a facts and circumstances rule or a percentage limit. Chapter 3 also excludes from Chapter 5 any profits falling within Chapter 8 (solo consolidation), which applies to subsidiaries of banks that are within either condition A or B of TIOPA10/S371CG.

A CFC that has non-trading finance profits derived from a “qualifying loan relationship” may claim that the profits arising should be dealt with under Chapter 9(exemptions for profits from qualifying loan relationships) instead of Chapter 5. Where a Chapter 9 claim is made and accepted the general rule is that 75% of the profits of the qualifying loan relationships of the CFC will be exempt. There may also be between 75% and 100% exemption of the profits in certain limited circumstances. Such a claim would apply to all of the CFC’s qualifying loan relationships in existence during the whole or part of the CFC’s accounting period (excluding those that are incidental to the exempt business activity of the CFC) so that only non-trading finance profits that do not arise on qualifying loan relationships would remain subject to Chapter 5.

Non-trading finance profits from qualifying loan relationships may in practice be exempt under the Low Profit, The Tax, Low Profit Margin, Excluded Territories, or Exempt Period exemptions. Chapter 5 will have no application where a CFC meets the conditions to qualify for these entity level exemptions and a CFC that meets the conditions for any of these exemptions will be exempt in full on all of its profits.