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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: Full Exemption - Qualifying Resources: What are Qualifying Resources?: Profits from lending to the territory: contents

A CFC that makes a qualifying loan relationship (“QLR” - INTM217000) to a group company in territory X will earn profits from the loan. Those profits are qualifying resources if they are re-lent by the same CFC to the same borrower, or to another group borrower also in territory X (TIOPA10/Part 9A/S371IB(6)(a)).

Unlike other categories of qualifying resource, this type of profit is qualifying only if it is used directly by the company in which the profit arose, in other words the company making the loans. There is nothing in the legislation to allow these profits to be qualifying resources for any other company.

If the profits are distributed by the CFC, they lose their character as its profits and so cannot be recreated as qualifying resources if they are returned to the CFC, for example as a new capital contribution. Lending however does not alter the character of the profits in the same way.

It would be unusual to find that in every case, profits derived by a CFC from lending to a group company in a particular territory are immediately lent back to the same company or other group companies in the same territory. Where such profits are not immediately re-lent in that way, it is most likely that the money has been left on deposit in a bank account or deposited with a group treasury company. Where the CFC can demonstrate that lending profits have been put on short-term deposit in this way, then subsequent use of the money for more lending activity will not prevent the original profits from being qualifying resources - the profits from the original lending have not been distributed; they still belong to the CFC. The interest earned from the short-term deposit, if also used to fund subsequent lending to group companies in the relevant territories, will not represent qualifying resources. And if lending profits are placed on short-term deposit with a UK resident group company, a full CFC charge will arise on these interest receipts.