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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: The Ultimate Debtor Rule - Detailed Application: Amounts exempted under Chapter 9 and subsequent adjustments under Chapter 6

Interaction of amounts exempted under Chapter 9 and subsequent adjustments under Chapter 6

The fact that the ultimate debtor rule would almost certainly prevent any loan to a financial trader from being a qualifying loan relationship (QLR) (see INTM217000) is mitigated by removing that restriction in the case of a loan to a bank or insurance company that lends the money on in the ordinary course of its banking or insurance business. However to the extent that the loan then qualifies for full or partial exemption under TIOPA10/Chapter 9, it will be treated as if it were an equity investment for the purposes of section 371FA, by way of subsection 371FB(2). So if a CFC’s non-trading finance profits (NTFPs) (see INTM203000) from a QLR to a connected CFC within Chapter 6 are wholly exempt, then 100% of the principal value of the loan outstanding during the accounting period should be added to the balance of the CFC’s free capital (as defined in subsection 371FA(2)) if the CFC is a bank or free assets (as defined in subsection 371FA(3)) if the CFC is an insurance company. Section 371FC applies a similar rule where the creditor is not a CFC but an exempt PE within CTA09/Part 2/Ch3A. So loans that are treated as QLRs from exempt PEs will therefore be counted as equity for Chapter 6 purposes in the same way as loans that are treated as QLRs from CFCs.

This rule has the effect that profits from QLRs where a banking or insurance CFC is the ultimate debtor can qualify for full/partial exemption provided that the loan is not funded from the UK directly or indirectly from a UK resident bank or insurance company. If the loan leads to overcapitalisation of the banking or insurance CFC, this does not prevent the profits of the lending CFC from being exempt but a charge under Chapter 6 may arise on the banking or insurance CFC if some or all of the overcapitalisation is derived from UK connected capital contributions.