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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 2

UK activities


As with loan 1, the significant people functions (SPFs) when the original loan was made, were not carried out in the UK. Again, as with loan 1, while the SPFs of ongoing management of the risks associated with the loan are undertaken in the UK, in this case, as there is little in the way of management of those risks required, much more weight would be given to the SPFs associated with the creation of the loan. Most, and possibly all of the profits won’t fall within TIOPA10/S371EB.

The SPF involved in the roll-over of the original loan (creating a new loan) and the ongoing management of the risks associated with that loan are all undertaken in the UK. TIOPA10/S371EB is almost certainly met in respect of the new, rolled-over loan, subject to there simply being a continuation of the original decision.

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Capital Investment from the UK


Loan 2 is not funded out of relevant UK funds or other assets and so TIOPA10/S371EC is not met for either the original loan or the new, rolled-over loan.

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Arrangements in lieu of dividends


It is probably not the case that section 371ED would apply immediately after the group migrates to the UK. Initially TIOPA10/S 371ED has no application as loan 2 was not made originally as an alternative to the financing CFC paying a dividend or other distribution to a UK parent. However, it is possible that over time this may change. Following the migration, it will be possible for Financing CFC to pay dividends indirectly to UK Plc. If over time a main purpose develops of keeping the arrangement in place (note the focus is on the arrangement and not the purpose for which the funding is needed in the UK) because of a fiscal arbitrage opportunity, then it might be concluded that the arrangement has expanded to include UK Plc and that the arrangement is being kept as an alternative to Financing CFC paying (indirectly) dividends. While an arrangement will typically be a loan from the CFC to its UK parent, TIOPA10/S371ED is wider in its application and will catch for example (as well as the scenario here) scenarios where a 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.