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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: Full Exemption - Qualifying Resources: What are Qualifying Resources?: Funds derived from shares: contents

The second type of qualifying resource is funds derived from shares (section TIOPA10/Part 9A/S371IB(6)(b)). Shares may be used to create funding for a loan through a wide range of transactions, including:

  • the CFC exchanges shares for debt;
  • the CFC funds a loan from a distribution;
  • equity is invested in the CFC and used by the CFC to make a loan;
  • a loan may be ‘pushed down’ to the CFC in return for newly issued shares.

The conditions under which funds are considered to be derived from shares are set out in section 371IB(7)

It is possible that shares can be used to create funding for a loan through a capital contribution. So, for example, if a UK company owns shares in a CFC and provides funds derived from qualifying resources to the CFC by way of a capital contribution, rather than the issue of new shares in the CFC, the funds will be treated as being derived from shares.

This conclusion is not so obvious if the capital contribution was not made by the direct shareholder. However where qualifying resources are sourced by a member of the CFC group and provided as funds by way of a capital contribution directly to a CFC in which that member has an indirect shareholding, then provided it is clear the capital contribution is made in relation to the shareholding in the CFC, the qualifying resources will be treated as derived from shares.

What funds derived from shares are qualifying?

There are three categories given in section 371IB(7):

  • Profits derived from group operations in the relevant territory. These may be realised or unrealised profits.
  • Value representing consideration in a share for share exchange.
  • Proceeds of a rights issue.