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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC Charge Gateway Chapter 6 - Trading Finance Profits: Introduction

Chapter 6 considers whether a CFC with ‘trading finance profits’ (a financial trading CFC such as a bank or an insurance company) is overcapitalised and to what extent that any overcapitalisation is the result of capital contributions from connected UK companies. Trading finance profits of the CFC arising as a result of the overcapitalisation will pass through the CFC charge gateway at Chapter 6 (Chapter 6 profits).

Trading finance profits of a CFC fall within Chapter 6 if two factors are present. These are, firstly that the CFC holds free capital or (in the case of a company carrying on insurance business) free assets greater than that it would be expected to hold if it were not controlled by any other company; and secondly that the CFC has UK connected capital contributions.

Trading finance profits is defined at TIOPA10/S371VG(4) (see INTM248450). It includes amounts that would be calculated as loan relationship profits under Parts 5 to 7 of CTA 2009 and would be taxed under those Parts if they did not arise from trading operations (and so are taxed under Part 3 of CTA 2009).

The assessment of whether a CFC has Chapter 6 profits involves a three step process. The second of which applies only to those CFCs carrying on insurance business (insurance CFCs).

Step 1 determines whether the ‘free capital’ of a financial trading CFC exceeds the amount that would be held were the same activities carried on by a company not controlled by any other company (step 1 amount).

For insurance CFCs, step 2 must also be taken. This step determines the extent to which the CFC’s ‘free assets’ exceed the amount that would be held were the same activities carried on by a company not controlled by any other company (step 2 amount).

If step 1 or step 2 determines that the CFC’s free capital and/or free assets are excessive, and there have also been ‘UK connected capital contributions’, step 3 identifies the trading finance profits to which Chapter 6 applies. It does this by reference to the amount of profits that it is reasonable to suppose are attributable to the investment, or other use, of the step 1 or step 2 amounts. Thus, giving the Chapter 6 profits.

UK connected capital contributions are defined at section TIOPA/S371VA (see INTM248100) and are any capital contributions made to the CFC, whether that be directly or indirectly, by a UK resident company connected with it. Contributions will fall within this definition even when capital is contributed from the UK as part of a conduit arrangement. For example, capital contributions will still be within scope even where a CFC is financed from capital sourced from an overseas group company, but the arrangement requires a UK group company to receive a dividend prior to that company immediately contributing that capital from the UK (directly or indirectly) to the CFC.

The extent to which UK capital contributions are present will be determined by the specific facts of each case, but it should be noted there is no limitation on how far back the identification process can look. If it is not readily clear whether UK connected capital contributions are present, or if identifying them will be resource intensive, it may be more appropriate to firstly determine whether excess free capital or excess free assets arise before undertaking this work i.e. if no excess free capital or excess free assets are present, no Chapter 6 charge can arise so there is no need to consider the presence of UK capital contributions.

It follows that where a financial trading CFC has excess free capital and/or excess free assets but does not have any UK connected capital contributions, then there are no Chapter 6 profits.

Although no trading finance profits may pass through the CFC gateway at Chapter 6, financial trading CFCs will still need to consider whether the other gateway chapters apply to its finance profits. For example, it is possible that an insurance CFC could hold capital and assets in support of an activity separate from its main insurance business. Any profits arising from this separate activity will not fall to be considered under Chapter 6 - for example, non-trading finance profits would be considered under Chapter 5 (see INTM203000). In cases of uncertainty, please liaise with your International Issues Manager or Foreign Profits Team contact as appropriate.