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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: Case Study

The following example considers the application and interaction of TIOPA10/S371EB (UK activities), S371EC (capital investment from the UK) and S371ED (arrangements in lieu of dividends to UK resident companies) on a migration of a non-UK headed group into the UK and the subsequent changes made in the following years.

In this particular migration a new UK holding company is created by the shareholders in overseas ultimate parent company (“Old Parent”) exchanging their shares for shares in a new UK company (“UK Plc”).

The group has a Group Treasury division which has responsibility for:

  • recommendations to the Board on significant external borrowings;
  • decisions on how investment around the group is to be structured (loan capital or equity capital);
  • reviewing and making decisions on applications by group companies to borrow either externally or intra-group;
  • setting the terms of intra-group loans with more than a 12-month term;
  • setting parameters for short-term intra-group deposits and borrowing;
  • monitoring risks of default by intra-group borrowers;
  • setting strategy for and monitoring hedging risks for the group and on individual loans, including interest rate and FOREX risk.

The Group Treasury is re-located to the UK post-migration.

Shortly after migration the external borrowings of Old Parent are replaced with new external borrowings by UK Plc. The new borrowings are slightly cheaper.

At the point of migration to the UK there are two existing intra-group loans. Loans 1 and 2 were made four years prior to the migration of the group to the UK. They were made to leverage overseas trading company (“Trading CFC”) and a UK trading company (“UK Trading”), which were acquired by Old Parent a short time before. Old Parent borrowed externally to help fund those acquisitions - those borrowings being passed down to an overseas financing company (“Financing CFC”) by way of equity. While Group Treasury has responsibility for the ongoing risks outlined above, in this case, neither of the loans requires hedging and the credit-worthiness of both borrowers is very strong throughout the term of the loans.

Financing CFC is a group financing company and has responsibility for:

  • decisions on whether to lend to another group company (but only on the recommendation of Group Treasury);
  • administration and monitoring of loans (for example ensuring interest payments are made on time).

Three years after the migration of the group to the UK, loans 1 and 2 are due to be repaid. Taking into account representations made by the debtor companies - Trading CFC (loan 1) and UK Trading (loan 2) - but also taking account of other factors relevant to the group, including its effective tax rate, Group Treasury decide the loans will be rolled-over on slightly different terms. It makes recommendations as such to the two borrowers and overseas financing company and fresh loans are made.