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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 Excluded from the definition of a Qualifying Loan Relationship: Section 371IH(3)

Section 371IH(3)

TIOPA10/Part 9A/S371IH(3) provides that a loan relationship cannot be a qualifying loan relationship (“QLR” - INTM217000) where:

  1. the ultimate debtor is itself a CFC to which Chapters 3 to 8 (the gateway) or Chapter 12 (the Low Profit Exemption)) apply in any of that CFC’s accounting periods and some or all of the debits of the CFC are being brought into account for the purposes of those Chapters, and
  2. as a result there is no CFC charge for the accounting period in question, or the charge is reduced.

The loan relationship is disqualified from being a QLR if the CFC charge apportioned from the ultimate debtor’s profits is reduced to any extent by debits in respect of the loan relationship. Although not all of the debits may reduce the CFC charge, the test in section 371IH(3) is an all or nothing test, where the conditions in both sub-sections (a) and (b) are met. If the condition in sub-section a) is met, but that doesn’t lead to a reduction in the CFC charge then the condition in sub-section b) is not met.

In the link to the example below, Financing CFC provides a loan to Trading CFC on which interest arises of £10m. Trading CFC has profits of £40m. The interest on the loan is allocated between the Trading CFC’s exempt property business profits (of £30m) and trading activity (£20m), the profits of which pass through the Chapter 4 charge gateway. The loan was used to acquire the property and trading assets and so the interest is pro-rated between the two activities – 40% of the interest allocated to the non-exempt trading activity. As a result of the interest charge the profits that pass through the CFC charge gateway by way of Chapter 4 are reduced to £16m - if there was no loan the CFC charge would be £20m. On this basis the debits in Trading CFC do reduce the CFC charge under Chapter 4 and so, by virtue of section 371IH (3), the loan made by Financing CFC A will not be a QLR for the purposes of Chapter 9.

Use this link to view example diagram