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: Cash Pooling
There are a number of circumstances where a CFC may deposit funds for a short period of time with a bank or a group treasury company. For example, a CFC may deposit cash from dividends received from subsidiaries or cash received from the issue of shares for a short period of time in its bank account. Non-trading finance profits (NTFPs) (see INTM203000) earned in respect of such deposits will not be NTFPs from qualifying loan relationships (QLRs) (see INTM217000). However monies on deposit in this way should most likely benefit from the holding company incidental income exclusion in one of TIOPA10/Part 9A/S371CC or S371CD. However if those exclusions are unavailable then amounts may pass through the chapter 5 charge gateway as the ultimate debtor in these circumstances is an unconnected company.
As an example, the funds provided by a loan made by a CFC to a qualifying company are temporarily deposited with a local bank for two weeks before being used in the company’s property business. The deposit for this short period would not be treated as though the loan from the CFC had been used to make a loan to another person; the deposit would just be treated as merely incidental to the purpose of making the investment and not as making a further loan for that period. Whether NTFPs arising on a short term deposit of this nature with a third party or with a UK connected company should be treated as incidental to the intended business purpose of the loan will be a question of fact.
It is possible that the ultimate debtor rules might have an impact on a group’s cash pooling arrangement. For example, a group might operate a cash pool that is centralised in a UK treasury company, with all members of the group being required to use the cash pooling arrangements. A cash pool is usually used to manage the short term working capital requirements of the group. CFCs within the group that have cash on deposit with the pool would be expected to benefit from the incidental finance income exclusions within Chapter 3 (see INTM197750) and so the ultimate debtor rule would not apply to such short-term loans (because the NTFPs from the short-term loans would not fall within Chapter 5). However, if a CFC makes a long-term loan to the UK resident treasury company, which in turn uses the funds to make a series of short term loans to other group members, then the NTFPs of the CFC will most likely fall within Chapter 5 and, if a claim under Chapter 9 is made, the ultimate debtor rules will need to be considered. In practice groups will need to separately identify such loans from the generality of the cash pool for accounting purposes and so the tracing requirement imposed by the ultimate debtor rule should not be unduly onerous.
In the link to the example diagram above, the cash flows in the example represent a highly simplified snap shot of what a group’s cash pooling arrangement might look like. In order to apply Chapter 9 to such arrangements the following are some of the factors that should be borne in mind;
- A group’s cash pooling arrangements (even where the Financing CFC does not directly participate) will require review and consideration as part of the overall risk assessment for the group.
- Physical cash sweeping arrangements may be more difficult when establishing the ultimate debtor for Chapter 9 purposes where this is necessary i.e. the cash pool includes non-incidental loans.
- Incidental temporary fluctuating surpluses (e.g. Loan C) placed with a bank by a foreign borrower are unlikely to taint an otherwise qualifying loan (Loan A).
- BUT, structural deficits funded from the cash pooling arrangements may cause problems (e.g. if the £20m overdraft (Loan D) to the UK has some degree of permanence the UK may be the ultimate debtor in relation to the structural deficit and so a CFC charge may be applicable in relation to NTFPs arising on the balance – a Chapter 9 claim would not be available).
- If loan B was a long term loan, this would mean the NTFPs earned on that loan would be caught under Chapter 5. Unless the group could demonstrate that Loan B was wholly used to fund Loan E, the loan would not be a QLR as it would be treated as a loan to a third party.