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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: Transfer pricing adjustments in the context of Chapter 9

When calculating the UK measure of profits of a CFC (the assumed taxable total profits, transactions between the CFC and other connected persons have to be priced in accordance with the arm’s length principle. Another consequence of taking account of the assumptions made when calculating the assumed taxable total profits are that the CFC is assumed to be a company tax resident in the UK. This means that the CFC can be assumed to have made a claim for a compensating adjustment under TIOPA10/S174 if that provides a beneficial outcome in relation to the calculation of the CFC’s assumed taxable total profits.

There may be transactions between two CFCs, whereby one CFC’s profits are increased because of a transfer pricing adjustment, and the other CFC’s profits are calculated taking account of an assumed claim for a compensating adjustment. The amount of the compensating adjustment is unaffected by the outcome of any claim under Chapter 9 in respect of the CFC whose profits have been increased in line with the arm’s length principle. At first glance this may seem odd, and even to confer some sort of advantage.

However, as the following example shows, the overall outcome means the profits from lending to the ultimate debtor are only considered once in relation to the CFC rules. To the extent the profits “pass through” one of the CFCs, those profits are only effectively brought into charge and partially exempted in relation to the second CFC.

Use this link to view example part one

Use this link to view example part two