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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: Example 2

Example

A group has six UK companies that have interest receipts and interest deductions. Two UK companies, F and G, are chargeable companies and have leftover profits (i.e. NTFPs from QLRs that are not exempt by virtue of sections 371IB or 317ID) that will be subject to a CFC charge, subject to the application of the matched interest rule.

The relevant finance income amounts and finance expense amounts of the six UK companies are set out in the table below. The second part of the table includes the finance income that would be taken into account under section314A TIOPA if the leftover profits are apportioned to the UK companies F and G.

Note that the finance expense of £20m payable by company G is included twice in the table, to better demonstrate an example where the apportionment of leftover profits would affect both the tested expense amount (TEA) and tested income amount (TIA). However the amount is only included once in the calculation of the TEA.

 

  Finance Income Finance Expense Net FI or FE Part of TEA Part of TIA
           
Company A (£20m) £60m £40m £40m Nil
Company B   £100m £100m £100m Nil
Company C (£100m)   (£100m) Nil £100m
Company D (£10m)   (£10m) Nil £10m
Company E (£75m) £80m £5m £5m Nil
Company G   £20m £20m £20m Nil
Total TIA & TEA       £165m £110m
           
TEA-TIA       £55m  
Applying s314A          
Company F (£60m)   (£60m) Nil £60m
Company G (£15m) £20m £5m (£15m) Nil
           
Adjusted TIA & TEA amounts       £150m £170m
           
TEA-TIA       (£20m)  

 

E is the amount by which the total of the leftover profits (£75m) apportioned to the chargeable companies in the groupwould cause the TIA to exceed to TEA (£20m)

I is the amount by which the figure of TIA would be increased through the apportionmentof the leftover profits to the UK chargeable companies in the group (£60m).

R is the amount by which the figure for TEA would be described through the apportionment of the leftover profits to the UK chargeable companies in the group (£15m).

Z% = 100% x E/I+R

Z% = 100% x £20m/£60m + £15m; and so Z% = 26.67%

Company F has leftover profits of £60m and so 26.67% of those profits - £16m - are exempt under section 371IE.

Company G has leftover profits of £15m and so 26.67% of those profits  - £4 - are exempt under section 371IE.