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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC charge gateway chapter 8 - solo consolidation: introduction

Regulatory constraints would ordinarily inhibit a UK bank from financing a CFC mainly with equity, because a shareholding in a CFC will generally be disregarded for regulatory purposes, so requiring the UK bank to fully replace the capital so invested in order to fulfil its regulatory obligations, which may themselves be increased by its exposure to the risk inherent in the subsidiary’s business.

Solo consolidation allows a UK bank to treat an unregulated CFC as if it were a division of the UK bank rather than a separate entity. More information can be found here).

This negates the regulatory disincentive for equity investment in a CFC, because the CFC’s assets are treated as if they were held by the UK bank.

A UK bank would have a strong incentive to place capital in a CFC in a low tax jurisdiction if it were able to obtain approval for solo consolidation for that CFC. The CFC would undertake banking operations without any cost of borrowing, so would make disproportionately large profits, while the UK bank would incur all the cost of borrowing for both the UK and non UK banking operations. The consequence of solo consolidation of a CFC could therefore be to substantially reduce the UK bank’s profitability without affecting the profitability of the combined enterprise.

Where a UK bank is regulated on the basis of solo consolidation of a CFC, TIOPA10/Part 9A/Chapter 8 provides that the potentially apportioned profit of the CFC should be the amount of profit (if any) that is in excess of the profit that would have been attributed to the CFC if it had been a foreign PE of the UK bank.