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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: Management Fee Deduction

The calculation of the non-trading finance profits that pass through the CFC charge gateway by virtue of them falling within Chapter 5 takes account of any expenditure or deduction that would be taken into account in calculating the CFC’s assumed total profits. In arriving at the amount of non-trading finance profit that is attributable to capital investment from the UK, TIOPA10/S371EC(2) and (3) allow for an additional deduction that represents the difference (if any) between the arm’s length fund management fee that it is reasonable to suppose would be charged for managing the funds or assets and the management expenditure actually incurred in realising the non-trading finance profit.

Where a deduction is taken for an arm’s length management fee then TIOPA10/S371BA(3)(b) is effectively switched off, i.e. it is not possible to obtain a deduction for both the management fee and just and reasonable amounts in accordance with step 2 in section 4(2) of CTA 2010.

Example of arm’s length management fee.

A CFC is wholly funded by share capital of £1bn issued to a UK group company. That share capital is used to fund a number of loans to overseas group companies. The assumed taxable total profits for the accounting period ended 31 December 2014 is £40m. That figure is arrived at after taking account of administration fees for the CFC’s own staff and resources totalling £300,000, which relate to ongoing management functions associated with the loans. The group considers that the arm’s length price that would be charged by a third party for the administration fees of £300,000 performed by the CFC would be £320,000. The difference of £20,000, between the administration fee actually charged and the amount that would be charged at arm’s length is deducted from the amount of assumed total profits that pass through the Chapter 5 charge gateway.