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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: Capital investment from the UK - Example of capital investment from the UK: compensating adjustment


An Irish resident CFC makes an interest free loan to a CFC resident in Luxembourg which in turn uses the funds to make an interest-bearing loan into Germany. As Irish CFC computes its assumed total profits on the assumption that it is UK resident, the transfer pricing provisions at Part IV TIOPA 2010 will apply and an arm’s length amount of interest will be imputed and included in Irish CFC’s assumed total profits. On the basis that Luxembourg CFC is then the disadvantaged company with regard to the transaction, it can assume a claim for a compensating adjustment is made under sections 174 and 179 TIOPA 2010 in computing its own assumed taxable total profits.

The Luxembourg CFC does not actually make any payment of interest to Irish CFC and so while its profits for Luxembourg tax purposes show only a small margin (because it can claim a deemed deduction against its interest receipt), the CFC has surplus cash from the interest receipts from the loan to Germany. The CFC uses this cash to subscribe for shares in another Luxembourg CFC, which in turn lends that money to other CFCs.

The non-trading finance profits of the second Luxembourg CFC arise from loans that indirectly represent amounts that were left out of the first Luxembourg CFC’s calculation of its assumed total profits as a result of this compensating adjustment. The non-trading finance profits will therefore pass through the Chapter 5 charge gateway under TIOPA10/S371EC(4)(c).