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HMRC internal manual

International Manual

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HM Revenue & Customs
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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: Loans to Banking, Insurance and

The ultimate debtor rule is modified for banking or insurance groups. TIOPA10/Part 9A/S371IG(7) disapplies the look through provisions in subsections (4) and (5) in respect of a loan made by a CFC to a qualifying company whose main business is banking or insurance and the loan is made in the ordinary course of that business (in other words the group company receives that money as part of its business and uses that money to make loans in the ordinary course of its business).

However, the look through provisions still apply if that group banking or insurance company uses the loan to fund a loan to a UK resident qualifying company; instead the lending must be to a third party. If a loan from a CFC passes through one banking or insurance company to another banking or insurance company, then the subsequent lending by the second company is tested to see whether it is made to a UK resident qualifying company.

Without this effective ‘switch off’ of the ultimate debtor rule for banks and insurance companies, it would be difficult for the 75% exemption to apply to CFCs lending to such companies as the funds received would always be used to on-lend given this is the trading activity of such companies. There may be arguments that a banking or insurance company would not be able to identify loans from a CFC that are then used to fund loans to other group companies rather than third parties. However there is a distinction between say a CFC that might deposit surplus cash with a member of the same group that carries on banking activity and earn interest that would be treated as incidental non-trading finance profits (NTFPs) - (see INTM197750) under section 371CB or CC, and a financing CFC whose profits fall within Chapter 5. If such a CFC is funding a banking or insurance company, then we would expect the group to be able to demonstrate there is no subsequent lending to other UK resident qualifying companies; or, if there is lending that is it clear there is no link with the lending from the CFC.

Banking business is defined in section 371VA to mean the business of;

  1. banking, deposit-taking, money-lending or debt-factoring, or 
  2. any activity similar to an activity falling within paragraph (a).

It is possible that a treasury company in a non-financial services group could be undertaking banking activity that falls within section 371VA so that it would then be potentially subject to section 371IG(7). This could present problems where the treasury company is a UK resident group company that is a qualifying company, as the treasury company may be treated as the ultimate debtor, as opposed to say another non-UK resident qualifying company that the UK treasury company on lends to. However if it can be demonstrated in any case that a treasury company is simply a conduit and there is a clear link between a loan going in and a loan going out then section 371IG(7) will not apply in respect of that loan.

A company will only fall within the banking definition in section 371VA where there is significant activity with a high volume of transactions that indicates that the treasury company is effectively acting as an in-house bank for the group. Any claim that the activity of a group treasury company meets the definition of banking business will need to be considered critically where the treasury company is making loans to UK resident group companies or has deposited significant amounts of money with a third party.