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.
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.