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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: How do you determine the profits of a Qualifying Loan Relationship: Calculation in the case of a Qualifying Loan

Example:

A group has a CFC that has been making intra-group loans for a number of years. The group and all its subsidiaries prepare their account to 31st December each year. In each of 2012 and 2013 the CFC, based on a UK tax measure of profits, has an overall non-trading deficit (£5m and £13m respectively) due to un-hedged FOREX losses on the loans and interest on borrowing used as part of the source of the funds for the CFC’s on-lending. There is no CFC apportionment in either of the years 2012 or 2013.

The non-trading deficit in 2013 is created by a FOREX loss of £40m and loan interest paid of £8m. 75% of the FOREX loss (£30m) related to loans that are QLRs in the accounting period. 60% of the loans made by the CFC  in 2013 were  QLRs and the borrowings used to fund those loans is considered to support the loan book as a whole rather than separate loans - so 60% of the borrowings are attributable to the QLRs.

In 2014 the CFC has non-trading loan relationship credits totalling £80m made up as follows:

  • £40m from loan relationships that are QLRs
  • £30m from loan relationships that are non-QLRs
  • £10m from a loan to the UK which is part of a back to back arragement with the UK group treasury company to hedge some of the FOREX exposure on some of the CFC’s loan book. All the loans hedged are QLRs.

The CFC pays interest on the back to back loan (£10m) and on the loan to fund its loan book (£7m) in 2014. The CFC also pays expenses of £500,000 that would be treated as management expenses if it were a UK resident company.

The calculation of the CFC charge for 2014 is set out in the table below, taking account of the following:

  • The non-trading deficit for 2012 is not taken into account in calculating the CFC charge for 2014 as this arose in an accounting period before the commencement date for the new CFC rules in Part 9A on 1st January 2013.

 

  • The assumed taxable total profits of the CFC for 2014 are £50m (non-trading loan relationship credits of £80m, less non-trading loan relationship debits of £17m, less non-trading deficit brought forward from 2013 of £13m). Note this is the UK tax measure of profits. It is not the amount of profits that necessarily pass through the CFC charge gateway.

 

  • The non-trading deficit for 2013 is treated on a just and reasonable basis as being split as follows:
    • Total defcit is £13m
    • 40/48 of deficit represented by FOREX loss = £10.8m
    • 75% of that proportion of the FOREX loss relates to QLRs = £8.1m
    • 8/48 of deficit represented by interest = £2.2m
    • 60% of the interest relates to QLRs = £1.3m
    • £9.4m (£8.1m + £1.3m) of the non-trading deficit for 2013 treated on a just and reasonable basis as relating to QLRs

 

  • £10m of the interest payable in 2014 relates to the back to back loan which has been used to hedge QLRs

 

  • The remaining £7m of the interest payable in 2014 is apportioned on a just and reasonable basis of 4/7 relating to QLRs (£4m) and 3/7 relating to non-QLRs (£3m)

 

  • The interest received on the back to back loan to the UK in 2014 is treated as being received in respect of a QLR

 

  • The management expenses for 2014 are apportioned on a just and reasonable basis as 4/7 relating to QLRs (£285,714) and 3/7 relating to non-QLRs (£214,286).
Calculation of profits that pass through the CFC gateway under Chapters 5 and 9 2013 2014
     
     
Non-trading deficit (£13m)  
Non-trading finance profits (made up of)    
QLR Credits   £40m
Credits on hedging loan (also treated as a QLR)   £10m
Non-QLR credits   £30m
Non-trading loan relationship debits   (£17m)
Non-trading loan relationship deficit B/F   (£13m)
    £50m

 

Calculation of profits that pass through the CFC gateway under Chapters 5 and 9 2013 2014
     
     
QLR profits   £26.6m
Exempt QLR profits (75%)   (£19.2m)
QLR profits from Chapter 9 that pass through the CFC charge gateway   £7.4m
     
Profits from non-QLRs    
NTFP excluding those in Chapter 9 (made up of)    
Non-QLR credits   £30m
Non-trading loan relationship debts   (£3m)
Non-trading loan relationship deficit B/F   (£3.6m)
Chargeable profits from Chapter 5 that pass through the CFC charge gateway   £23.4m
     
S371BA(3)(a) assumed total profits that have passed through the CFC charge gateway   £30.8m
Management expenses relieved under S371BA(3) (b)   (£0.5m)
CFC Chargeable profits   £30.3m