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HMRC internal manual

International Manual

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Controlled Foreign Companies: The CFC Charge Gateway Chapter 9 - Exemptions for profits from Qualifying Loan Relationships: How do you determine the profits of a Qualifying Loan Relationship: The five step calculation

TIOPA10/Part 9A/S371IF contains five steps for calculating the profits of any qualifying loan relationship (“QLR” - INTM217000). The steps are intended to cover a large range of possible scenarios. In most cases it is likely that the profits of a QLR will only consist of its loan relationship credits (the interest payments due on the loan) and so the calculation won’t need to go any further than step 1.

Step 1 - determine the credits from the QLR that are brought into account for the purposes of determining the CFC’s non trading finance profits (“NTFPs” - INTM203000) for the accounting period. This will include interest receipts and any FOREX gain in respect of the QLR. The amount determined is “the Step 1 credits”;

Step 2 - add to the Step 1 credits any excess of credits over debits arising from derivative contracts or other arrangements such as back to back loans that are a hedge of interest rate or FOREX risk relating to the QLR. If the debits exceed the credits, subtract that excess from the Step 1 credits. The amount determined is “the Step 2 credits”;

Step 3 - allocate to the QLR a just and reasonable proportion of any credits (which will be any FOREX gains) relating to relevant debtor loan relationships of the CFC i.e. borrowings of the CFC that are the source of funds for the QLR. [The debits of these debtor loan relationships are taken into account in step 5]. Add the credits to the Step 2 credits to give “the Step 3 credits”;

Step 4 - add to the Step 3 credits any excess of credits over debits arising from derivative contracts or other arrangements such as back to back loans that are a hedge of interest rate or FOREX risk relating to the debtor loan relationships identified in step 3. If the debits exceed the credits, subtract that excess from the Step 3 credits. The amount determined is “the Step 4 credits”;

Step 5 - calculate the debits (so far as not reflected in the Step 4 credits) that are brought into account for the purposes of determining the CFC’s NTFPs for the accounting period. This will include debits (such as interest payments and FOREX losses) from debtor loan relationships used to directly fund the QLR, and from loan relationships that are general borrowings of the CFC. A just and reasonable proportion of the debits are subtracted from the step 4 credits to give the CFC’s QLR profits for the QLR in question. The debits subtracted here will also include a just and reasonable proportion of any brought forward non-trading debits (provided that they relate to accounting periods beginning on or after 1 January 2013).