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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: Subsequent transfer of UK Loan asset to CFC

Subsequent decision to transfer UK Loan asset to CFC

This example illustrates the operation of subsections (9A) - (9E) when one group purchases another using a loan from a UK company and subsequently decides to transfer the loan asset to a CFC.

A UK group purchases an unconnected foreign group and funds its subsidiary (Acquisition Co) with debt from a connected UK company, UK Holdco. At a later date the group restructures their intra-group financing and transfers the loan receivable from UK Holdco to a CFC (Finco) in Territory F.

It is established as a matter of fact that, prior to the acquisition, the group had considered using a CFC to make the loan to the acquisition company, but did not at that time make any firm decisions about how this would be structured.

The decision to use a particular CFC finance structure was made several weeks later after a further presentation from a firm of tax advisors that set out the UK tax benefits of various CFC financing structures. The group maintained that they had always intended to reorganise the intra-group financing once the acquisition was made but had been unable to finalise the structure before the purchase was completed. However they were unable to provide any evidence to support this. Instead it was established that there were in fact two arrangements entered into - the arrangement made for the acquisition, funded by debt from the UK, and a second arrangement that transferred the UK creditor relationship to Finco. As a matter of fact one of the main purposes of the second arrangement was to secure that there was a reduction in relevant UK credits.

Applying subsection (9A) to this example:-

  1. There is an existing UK creditor relationship. This is the loan relationship between UK Holdco and Acquisition Co.
  2. An arrangement is made to replace this loan with lending from Finco.
  3. One of the main purposes of the arrangement was to secure that the relevant credits of a UK connected company (UK Holdco) were lower than they would have been had the UK creditor relationship continued unchanged.

Therefore subsection (9B) applies and Finco’s creditor relationship is prevented from being a qualifying loan relationship.

It is important to note that the analysis does not necessarily turn on the length of time that the UK held the receivable, but the facts surrounding the arrangement(s) and their purposes.