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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: UK Activities: Example of a structural intra-group loan created with UK Significant People Functions (SPFs) on the occasion of a third party acquisition

A UK group acquires a US subgroup in the same market sector and transfers the newly acquired companies under a newly incorporated financing CFC in return for an issue of shares in the financing CFC. The US acquisition is then transferred from the financing CFC to a newly incorporated wholly owned US holding company for shares of US$200m and debt of US$600m. The UK Board of directors took the decision to make the acquisition supported by its strategic development team based in the UK. UK Group Treasury, in conjunction with the group’s tax department, developed the structuring of the plan to incorporate the new acquisition within the group including the setting up of the financing CFC and new US Holdco, the level of equity/debt, appropriate interest rates and hedging of risk etc. The financing CFC’s Board of directors considered and approved the decision and signed off the relevant papers. Two part- time members of staff are provided from a connected CFC in the same territory as the financing CFC to manage the administration of the debt on an ongoing basis, but any other activities or decision making in respect of the loan are taken by UK Group Treasury.

In these circumstances the active decision-making in terms of creating the loan, the acceptance of risk and its ongoing management are carried out in the UK and so the non-trading finance profits arising on the loan will fall within Chapter 5. The sign-off of decisions that have in essence already been made will not constitute a significant people function (SPF) and the low-value activity of the part time members of staff working for the CFC in managing the books and the bank account will not be a SPF with regard to the intra-group loan.

However what is said at B1 and in particular paragraph 9 of Part II of the Report may still be a useful starting point. In most intra-group situations the functions involved in the decision to make the loan on its particular contractual terms and the planning and processes leading up to that decision will be key. Part of this will often revolve around the structure of an intra-group investment and how the funds of the group should be employed. In many cases the tax efficiency of the structure will influence whether an investment is made and in what form and it will be important to look closely at the processes involved in this. The decision to make the loan must be considered in the context of any expectation that the CFC will provide funding for group purposes and where in the group the relevant SPFs in relation to such purposes are carried out.

In the context of intra-group funding there will always be considerations of the appropriate balance between debt and equity funding and the appropriate form and conditions of either. Transfer pricing rules will impose limitations in respect of the terms of intra-group lending and there is generally a less entrepreneurial role in relation to arriving at such terms than there would be in arms’ length negotiations. Groups will seek to manage their effective tax rates, including through decisions on the structure of the funding e.g. choice of entity, the type of instrument and the mix of debt/equity. Tax efficiencies provided by the operation of different fiscal regimes and any arbitrage opportunities will be an important factor. Where, within the group, such considerations are evaluated will be central to the functional and factual analysis.

Apart from this, functions such as negotiating the contractual terms with the borrower, deciding whether or not to lend and, if so, on what terms, evaluating the credit, currency and market risks related to the transaction, establishing the creditworthiness of the borrower and overall credit exposure to the borrower, deciding what levels of credit, currency and market risk to accept, pricing the loan, considering whether collateral or credit enhancement is needed, etc are all likely to be relevant. The capability within groups to evaluate and determine these issues is commonly centralised within the group treasury function, although this may be informed by information provided by support functions elsewhere that would not be considered SPFs.