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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: Arrangements in lieu of dividends

Arrangements in lieu of dividends to UK resident companies

TIOPA10/S371ED deals with non-trading finance profits that arise from arrangements made with the UK (the most common form of arrangement will be an upstream loan). It can apply even if the sources of the funds for loans are not from UK capital investment and the profits are attributable to non-UK resident significant people functions (SPFs). The section will pass non-trading finance profits through the CFC charge gateway to the extent that they arise from an arrangement, directly or indirectly, with a UK resident company connected with the CFC, or to UK permanent establishments of non-UK resident companies connected with the CFC. An arrangement will typically be a loan to a UK resident company. An example of an indirect arrangement would be a loan from the CFC to a non-UK resident person, who then makes a loan to a UK resident company that is connected with the CFC.

However there is an additional condition aside from the arrangement being with a UK connected company or permanent establishment. The condition is intended to limit the application of TIOPA10/S371ED to profits from arrangements that have been used to repatriate funds to the UK rather than passing those funds up to the UK by way of a distribution. Profits from such an arrangement will pass through the CFC charge gateway if it is reasonable to suppose that the arrangement has been made as an alternative to making a dividend or other form of distribution, directly or indirectly, to the UK and that the main reason or one of the main reasons for adopting the alternative arrangement is a reason relating to any UK or non-UK tax liability. This is not a test of purpose of the arrangement itself (which is likely to be to repatriate funds to the UK), but instead a test to determine the reason why the funds were repatriated in the form of a loan to the UK rather than a dividend being paid to the UK. The test will catch, for example, a loan being made by the CFC to the UK to repatriate funds to the UK instead of paying those funds back by way of a dividend because a dividend paid to the UK would have attracted withholding tax.

There may be cases where the main purpose or (where more than one) all the main purposes for adopting the arrangement (typically a loan) are unrelated to tax, in which case the non-trading finance profits relating to the arrangement will not pass through the CFC charge gateway by virtue of TIOPA10/S371ED. It is not enough that a loan has been made for a commercial purpose - the main purpose or one of the main purposes for choosing a loan rather than a distribution has to be a non-tax purpose, and alongside that there mustn’t be another main purpose that is tax related. For example, local exchange control restrictions or regulatory requirements may prohibit the payment of a dividend or a capital reduction and a loan may be the only alternative.

A tax reason includes both UK and non UK tax reasons for making a loan rather than paying a dividend. The avoidance of withholding tax on a dividend is often cited as a reason for making a loan rather than paying a dividend. However this is still a tax reason for the purposes of this test. TIOPA10/S371ED is wide in its application and will catch for example scenarios where an upstream loan is made to another UK group company rather than to the water’s edge UK parent. Establishing the purpose of any particular arrangement is a question of fact.