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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: What is a Qualifying Loan Relationship: The Ultimate Debtor Rule - Detailed Application: Test by reference to each

The ultimate debtor rule is an accounting period by accounting period test. This means that the assessment of who is the ultimate debtor in relation to a loan (or part of a loan) needs to be re-assessed in each accounting period. This means that, with a change of ultimate debtor or a change in the circumstances of the ultimate debtor, a loan could change from being qualifying to non-qualifying, or vice versa. The purpose behind the borrowing is only important to the extent that a loan is made to one person with the intention that it is then on-lent (in whole or in part) to another person. Otherwise the purpose for borrowing (e.g. to provide working capital for a group company) will not have a bearing on any possible change in circumstances of the ultimate debtor. In practice it is expected that once the ultimate debtor is established in relation to a loan then there should be no need to retest on an annual basis unless there has been a change in facts and circumstances. As the loans subject to the ultimate debtor rule are likely to be the significant structural loans within a group those individuals within the group managing the loan should be aware of the need to notify the tax department of any change to the facts and circumstances of the loan.


Example 1

A loan is made  by a CFC to another CFC  which is a qualifying company. The loan is used to fund a distribution by the secind CFC and is agreed  to be a QLR.  Three years later  the tax residence of the second CFC changes becuase central  management and control  is exercised from the UK  resident company. From that point onwards the company is no longer a qualifying company and so the original intra-group loan is no longer a QLR.


Example 2

A loan is made by a CFC A to another CFC B which is a qualifying company. The loan is used by the second CFC to acquire a foreign investment property. The loan is agreed to be a QLR. After 3 years the property is sold and the funds deposited with a local bank. At that point the loan will cease to be a qualifying loan as the ultimate debtor will be an unconnected third party. It is possible that the NTFPs arising on the bank deposit by CFC B will be treated as incidental by virtue of section 371CB (4) and so we won’t be caught by Chapter 5 but that is a separate issue and the answer to that question will not change the fact that loan is no longer a QLR.