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HMRC internal manual

International Manual

HM Revenue & Customs
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Controlled Foreign Companies: The CFC charge gateway chapter 9 - exemptions for profits from qualifying loan relationships: introduction: eligibility

Only certain non-trading finance profits (“NTFPs” - INTM203200) are eligible for a TIOPA10/Part 9A/Chapter 9 claim. Typically, the Chapter 9 exemptions will be available where there is straightforward intra group funding. An example might be where CFC X in Country Y needs a long term loan to invest in its exempt (in terms of the CFC rules) business activities. The group has resources to fund this loan and so it is not necessary for CFC X to borrow externally. Instead it borrows from a group finance company that has been equity funded using surplus group resource from the UK. Many groups have arrangements of this nature and should find identifying the NTFPs and qualifying loan relationships (“QLRs”) relatively easy, making a claim straightforward.

A Chapter 9 claim will therefore cover:

  • NTFPs that in substance arise to a CFC from loans to non-UK resident connected persons controlled by the UK person or persons that control the CFC; and 
  • Consequential profits and losses such as FOREX adjustments on the QLR and any associated hedge of either FOREX or interest rate risk in relation to the QLR or a loan that is the source of funds for the QLR.

A Chapter 9 claim will generally not cover:

  • NTFPs in respect of loans to UK resident connected persons;
  • NTFPs in respect of loans to unconnected persons or connected persons who are not controlled by the same UK person or persons who controls the CFC;
  • NTFPs in respect of loans to CFCs where the effect of the loan is to reduce the borrowing CFC’s chargeable profits (unless the profits that are reduced are themselves calculated under Chapter 9) or where the debits are relevant to the application of the Low Profits Exemption in Chapter 12;
  • NTFPs in respect of loans to UK and non-UK resident connected persons where the loan has been sourced from a UK resident person undertaking banking or insurance business; and
  • NTFPs in respect of loans to non UK resident connected persons where the loan is part of an arrangement to replace external debt of the non-UK resident connected person with external debt of a UK resident connected person as part of an arrangement that has a tax advantage main purpose for any person.

NTFPs from QLRs may in practice be exempt under the Tax, Exempt Period, Low Profits, Low Profit Margin or Excluded Territories exemptions. Chapter 5 will have no application where a CFC meets the conditions for these entity level exemptions and a CFC which meets the conditions for any of them will be exempt in full on all of its profits.