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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(7)(8)&(9)

There is a specific restriction in relation to CFCs which make loans from funds provided by a UK resident connected company whose main business is either banking or insurance. That company does not have to be a qualifying company (i.e. it does not have to be controlled by the same UK resident person that controls the CFC), it is enough that the UK bank or insurance company is connected to the CFC. The restriction applies where the UK resident connected company provides the funds (directly or indirectly) to the CFC other than by way of a loan (e.g. by shares or capital contribution) or the funds are provided by way of arrangement that gives rise to a deduction for the UK resident connected company (apart from the ultimate debtor) in the calculation of its trading profits..

The restriction is provided by TIOPA10/Part 9A/S371IH(8) and (9) which prevent a creditor loan relationship of a CFC from being a qualifying loan relationship (“QLR” - INTM217000) where it is:

  • sourced to more than a negligible extent from relevant UK funds (other than a loan) derived from a UK resident connected company which has a main business of banking or insurance; or
  • where the loan relationship was created as part of an arrangement which gives rise to a taxable Case I deduction for a UK resident connected bank or insurance company (apart from the ultimate debtor). This would include for example interest on a loan. 

The restriction in section 371IH(8) is not limited by any rule that specifies the source of the funds provided to the CFC by the UK resident bank or insurance company. So a structure used by the UK resident company to source and differentiate funds which doesn’t give rise to a direct taxable deduction will not prevent the application of the restriction in sub-section (8).

Use this link to view example 1

Use this link to view example 2 

As with section 371IG(7) the rules in sections 371IH(6) to (8) could potentially apply to a group treasury company within a non- financial services group whose activities fall within the definition of banking business. In many cases the majority of group financing transactions may originate from funds raised by the group treasury company or from transactions routed through it. Whether the treasury company (which might be a UK resident company or a CFC) is treated as trading is a matter of fact to be considered on a case by case basis.

Use this link to view example 3