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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC charge gateway chapter 9 - exemptions for profits from qualifying loan relationships: overview

Overview
Partial Exemption
Qualifying Resources
Matched Interest Rule
Limitations

Overview

TIOPA10/Part 9A/Chapter 9 provides the rules for full and 75% exemption of certain non-trading finance profits (“NTFPs” - INTM203200) that might otherwise pass through the CFC charge gateway because they fall within Chapter 5 (The CFC charge gateway: non-trading finance profits). Chapter 9 only applies to profits that arise from qualifying loan relationships (“QLRs” - INTM217000) as defined on the making of a claim (INTM216800) and where the business premises condition (INTM216650) is met. Chapter 5 in contrast can apply to all NTFPs of the CFC.

The exemptions for NTFPs provided within Chapter 9 have been introduced to address the difficult issues which arise as a result of the fungibility of money within a multinational group. The rules represent to a large extent a proxy for establishing the exact source and history (tracing) of a group’s financing arrangements and the extent these are borne by the UK.

Partial Exemption

(INTM218600)

In general it is expected that three quarters of the finance income arising on intra group loans between non UK resident members of a UK headed multinational group will be exempt from UK tax. Interest on money deposited with a third party such as a bank will in general be a ‘diverted profit’ that is within the scope of the Chapter 5 charge gateway. An example might be a cash-rich group that has invested its surplus funds in a bank based in a tax shelter.

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Qualifying Resources

(INTM218700)

The qualifying resources’ rules identify certain circumstances where there is no direct or indirect connection between a CFC’s lending and wider group funds. To the extent that it can be shown that a loan is funded out of qualifying resources, an equivalent proportion of the profits derived from the loan will be exempt from the CFC charge. These rules are optional and will only be beneficial where the qualifying proportion exceeds 75% due to their interaction with the partial exemption rules.

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Matched interest rule

(INTM219100)

The CFC charge for intra group interest is capped at the level of net UK interest expense within the UK group calculated using worldwide debt cap principles (Part 7 TIOPA 2010 - CFM90110). CFC charges in respect of NTFPs are treated as UK financing income for the purpose of calculating the cap. Overall the cap prevents the apportionment of NTFPs when the UK members of the group, in aggregate, have net financing income which is equal to or greater than their net financing deductions.

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Limitations

As well as rules that limit the extent to which claims for full and 75% exemption of a CFC’s NTFPs can be made, the rules in Chapter 9 also include restrictions to prevent abuse, for example by excluding loans made to the UK, and by excluding arrangements where external loans are moved from overseas to the UK to create a UK tax saving.