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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 QLR: Section 371IH(9A) to (9E): Examples: Temporary Loan from the UK

This example illustrates the operation of TIOPA10/Part 9A/S371IH(9A) to (9E) when one group purchases another using temporary funding from the UK.

A UK group purchases an unconnected foreign group with the intention of providing funding to this group by a new loan from a CFC (Finco) in Territory F. They then intend to make a claim under Chapter 9 of the CFC rules to exempt 75% of the profits of Finco from a CFC charge.

As part of the purchase process there is temporarily a loan from a UK group company (UK Holdco), to a non-UK resident group company( Acquisition Co). This loan is in place for a short period of time before it is transferred to Finco in exchange for equity in Finco.

Use this link to see a diagram steps for the loan and equity

It is established as a matter of fact that the group always intended to make the loan from a company resident in Territory F, rather than from UK Holdco, and that the loan from UK Holdco was a temporary measure necessary because it was not possible to capitalise and lend from Finco in time to make the acquisition. It is therefore appropriate to treat the series of transactions as a single arrangement.

Applying subsection (9A) to this example:-

There is no pre-existing UK creditor relationship. Although there is a loan from a UK company to a connected non-UK resident company, this loan was created as part of the arrangements entered into by the group and not beforehand.

Therefore subsection (9B) does not prevent Finco’s creditor relationship from being a qualifying loan relationship.