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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: Capital investment from the UK: Establishing a clear factual link on source of funding

There may be cases where a group can demonstrate a clear factual link that shows the loan giving rise to the non-trading finance profits was not funded from UK capital investment. For example in 2009 a UK headed group acquires a non-UK headed group which has an existing overseas finance company. That company was funded with $100m in equity from the overseas parent, and that money was used to make a loan to another non-UK company. As it can be clearly established that the loan was funded by non-UK investment, it will not comprise relevant funds or other assets for the purposes of Chapter 5. However instead it could be the case that the existing overseas finance company was funded with equity by a previous UK owner rather than from its present US owner. In these circumstances, and if the funds are clearly identifiable still, it is possible that the loan has been indirectly funded by UK capital investment.

In contrast, if a UK headed group transfers an existing financing CFC, that was funded by equity from its UK parent in order to make a loan to another trading CFC, to an intermediate CFC in exchange for shares or other consideration, section 371EC(4)(a) will continue to apply to the loan. This is because the original equity funding into the financing CFC was funds that derive directly from a capital contribution by a UK connected company in relation to an issue of shares by the financing CFC and the subsequent transfer of the financing CFC to the intermediate CFC does not change this situation.