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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: Matched Interest Rule: Applying the exemption: contents

The exemption provided by the matched interest rule will apply to all the amounts that make up the leftover profits, even if the comparison test does not include those amounts. So if the leftover profits are made up of interest receipts of £50m and a FOREX gain of £10m, and the comparison provides that

  1. all the leftover profits should be exempted then all the profits of £60m are exempted; or
  2. 50% of the leftover profits should be exempted then £30m of the leftover profits are exempted.

TIOPA10/Part 9A/S371IE(2) provides that all of the leftover profits will be exempt if the tested income amount (TIA) (ignoring amounts that would otherwise be added to the TIA through the application of section 314A for each UK group company - collectively referred to as the “relevant amounts”) exceeds or equals the tested expense amount (TEA). This will tend to apply most in cases where the UK part of a group has very little or no borrowing costs.

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However most cases are likely to be more complex. There will be cases where the TIA would only exceed the TEA because of the relevant finance profits that would be apportioned to the UK chargeable companies. In these cases section 371IE(3) provides that a percentage of the left-over profits in respect of the CFC’s qualifying loan relationships (“QLRs” - INTM217000) will become exempt if the various CFC charges in respect of the relevant finance profits cause the TIA to exceed the TEA. The percentage (Z%) of the leftover profits is given by the calculation in section 371IE(4):

100% x E

I + R

Where:

  • E is the amount by which the total of the leftover profits as computed in accordance with section 314A(1)(d) TIOPA from QLRs apportioned to the chargeable companies in a group would cause the TIA to exceed the TEA;
  • I is the amount by which the figure of TIA would be increased through the apportionment of the leftover profits as computed above from QLRs to the UK chargeable companies in the group (the “relevant amounts”);
  • R is the amount by which the figure of TEA would be decreased through the apportionment of the leftover profits as computed above from QLRs to the UK chargeable companies in the group (the “relevant amounts”).

This is demonstrated pictorially below

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