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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: Case Study: Consideration of loan 1

UK Activities - TIOPA10/S371EB

For the loan to fall within TIOPA10/S371EB, some or all of the significant people functions (SPFs) in relation to that loan must be undertaken in the UK. Some or all of the non-trading finance profits will then pass through the Chapter 5 charge gateway to the extent that they arise from assets or risks that would be attributed to an assumed UK permanent establishment under Step 5 of TIOPA10/S371DB(1). There may be more than one SPF in relation to a loan. One of the SPFs for the loan would have been the original decision to lend (the creation of the asset). This decision may actually in turn comprise several functions and an analysis will be needed to establish the various steps taken and who made them (or as the case may be who decided to make them). On the face of it, it appears that Group Treasury are likely to have undertaken the SPFs associated with the creation of the loan, such as setting the terms of the loan, the amount of the loan, the currency and the decision that a loan would be made at all. While Financing CFC made a decision to make the loan, the steps involved are likely to indicate this was made at the behest of Group Treasury, whose decision carried more weight than that of Financing CFC.

The ongoing management of the risks associated with the loan - which will usually, in the case of an intra-group loan, consist mainly of the management of the risk of default and hedging risks - will also be SPFs. These functions are undertaken by Group Treasury in the UK following the migration of the group to the UK. The monitoring and administration of the loan by Financing CFC are not SPFs.

It will be a matter of fact in establishing what the SPFs are, and then a judgement in deciding whether particular SPFs carry more weight than others. The general expectation in the case of significant intra-group loans, would be that the functions involved in the original decision to create the loan and the functions associated with the ongoing risk management in respect of that loan would be undertaken to a large degree (if not wholly) by Group Treasury. It will also be necessary to consider, based on the facts outlined in this case, whether the decision to create the loan carries more weight than ongoing risk management of the loan. In this case, because the risks being managed are not significant risks, it is likely that the more important SPFs related to the creation of the original loan were undertaken by non-UK resident persons. So the loan asset is unlikely to be attributed to the UK under step 5 of TIOPA10/S 371DB(1), but the risks associated with managing that asset will be. Accordingly in re-determining the profits of Financing CFC under step 7 of section 371DB(1), the profits attributable to the attribution of the loan asset are excluded. A small part of the profits may be attributable to the management of the risk and these profits will fall within TIOPA10/S371EB. If the risk associated with the loan are minimal, then it is possible that those profits would be nil.

The loan is rolled over three years after the group migrates to the UK. In effect a new asset has been created. As with the analysis above, the SPF involved in the creation of the loan, the decision that the loan will be rolled over, the amount of the loan, the currency, the revised terms of the rolled over loan, are undertaken by Group Treasury in the UK. The ongoing management of the risks associated with the loan are also undertaken by Group Treasury. It is more likely now that the loan asset would be attributed to the UK SPFs and so all the profits would fall within TIOPA10/S371EB. However, if that decision is to any degree a continuation of the original decision (so the original planning of the loan always envisaged that it would be rolled over) a more thorough investigation of the SPFs and where they are undertaken will be needed.

Capital investment from the UK

TIOPA10/S371EC

The loan from Financing CFC to Trading CFC is not relevant UK funds or assets for the purposes of section TIOPA10/S371EC(4) and the migration of the group to the UK does not introduce any contribution by the UK that has been used to fund the loan or the new rolled over loan.

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Arrangements in lieu of dividends

TIOPA10/S371ED

As the loan is not made to a UK resident company, TIOPA10/S371ED has no application.