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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: UK Activities: Example of UK Significant People Functions (SPFs) and “non-vanilla” loans

The facts and circumstances are the same as in the previous example except the Luxembourg CFC also holds certain intra-group funding in the form of “non-vanilla” loans. This type of loan includes loans where the main characteristic of the securities held are that the interest is dependent on the profits of the borrower, loans which carry a conversion option or are connected with shares or securities that provide a non-commercial return for the use of the principal secured (see CTA10/S1005). Immediately after acquisition it is likely that no Chapter 5 charge will arise as:

  • there are no UK SPFs at that point;
  • there is likely to be no capital investment from the UK in the Luxembourg company and
  • the company is not lending to the UK.

However these circumstances may change going forward and it will then become necessary to consider whether any of the profits of the Luxembourg CFC pass through the CFC gateway by way of Chapter 5.

Assuming there is a CFC charge at some point in the future, then in computing the Luxembourg CFC’s assumed total profits, an assumption of UK residence will apply and so the company distributions legislation at section 1000 and section 1015 (meaning of special security) CTA 2010 will apply subject to CTA10/S1032 CTA 2010. This section prevents amounts received by the Luxembourg CFC from being treated as exempt distributions when the company to which the distribution is paid is within the charge to corporation tax. As Luxembourg CFC is treated as being within the charge to corporation tax for the purpose of computing its assumed total profits, CTA10/S1032 will apply to amounts arising to Luxembourg CFC on “non-vanilla” loans” and so amounts will be treated as interest receipts unless an amount represents more than a reasonable commercial return for the use of the principal of the loan in which case this amount will be treated as a non-exempt distribution.