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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: Terms used in Chapter 6

Free capital

‘Free capital’ (section TIOPA10/S371FA(2)) is the funding the company has for its business that does not give rise to loan relationship debits brought into account by either Part 3 or Part 5 of CTA 2009. In broad terms this means free capital is share capital (including share premium) and retained profits, however it will also include funding such as interest free debt (to the extent no loan relationship debits arise on that debt).

Free assets

‘Free assets’ (section TIOPA10/S371FA(3)) are the amounts by which the value of an insurance CFC’s assets exceed its loan capital (i.e. money debts). The assets referred to are the gross assets of the CFC and are valued at a market rate i.e. the amount it is reasonable to suppose the CFC would obtain from a third party for the transfer of that asset (TIOPAS371FA(7)).

Not the 51% subsidiary of any other company

Both the free capital and free asset tests require a comparison to be made with a hypothetical case where the CFC is not controlled by any other company. This hypothesis does not require the CFC’s wider group, or its own subsidiaries, to be disregarded; rather the comparison to be made is between the capital and assets the CFC holds with that which would be held by a company (which carries on the same business) that is not a 51% subsidiary (CTA10/S1154) of any other company. The test seeks to determine the extent to which the CFC retains free capital and/or free assets because it is controlled by another company or companies, rather than for commercial (non-tax) reasons.

The above proposition may identify a number of comparable companies, which provide a range of free capital and free asset levels. Whether and where the CFC falls within such a range will depend on the facts of each case.