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HMRC internal manual

International Manual

HM Revenue & Customs
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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: Finance Expenses

TIOPA10/Part 9A/S371IF steps 3 to 5 require that finance expenses in respect of the CFC’s borrowings are taken into account in calculating the profits of a qualifying loan relationship (“QLR” - INTM217000). Where the CFC exists only to provide medium to long term structural loans, there may be no borrowings; and where there are any borrowings they will inevitably relate to the funding of specific loans made by the CFC. Where those loans are QLRs then all the financing expenses of the borrowing used to fund the QLR will be taken into account in calculating the profits of the QLR. As with debits and credits in relation to FOREX gains and losses where expenses of borrowing would be taken into account as a loan relationship debit, then they are taken into account in calculating the profits of a QLR. For example, legal fees in connection with a loan to a non UK resident connected person would be offset against the non-trading finance profits (“NTFP” - INTM203000) on that loan as a directly attributable expense.

By contrast if the CFC undertakes both financing activities and other trading activities, then it may be the case that any borrowings of the CFC would relate wholly to the trading activities and so its financing expenses would not be taken into account in the calculation of any QLR profits. Whether the borrowings support the trading activity or the intra-group lending activity will be a question of fact.

The CFC may have borrowings that are not directly referable to the funding of lending activity or of trading activity. For example a CFC undertaking wider treasury activities may incur borrowing costs in relation to the acquisition of its business premises or a mixed activity CFC may have incurred borrowing costs in relation to the acquisition of that CFC’s business. In such cases a reasonable proportion of the borrowing costs should be taken into account when calculating the profits of any QLR. The legislation is not prescriptive in how such expenses are to be allocated. In some cases an allocation by reference to capital requirements may be reasonable; in other cases allocation by reference to level of activity (which might be measured by reference to employee headcount) may be a reasonable measure. While one method may appear to be more accurate than another method, provided the first method is reasonable based on the particular circumstances of the case, then its use should be accepted.