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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: UK company used as a conduit in a CFC shelter

The structure in the previous example at INTM219500 is a common shelter used by UK multi-national groups. A simpler structure could be used, such as a lender in a territory that doesn’t charge tax on company profits. However such territories don’t tend to have double taxation agreements with other territories, and so the group companies paying interest will generally be liable to tax in their territory of residence (usually by way of withholding tax). The company in the nil tax territory won’t provide any double tax relief in respect of that withholding tax because there is no tax to set the withholding tax against. Groups tend therefore to use more complex shelters involving territories with good treaty networks, where in most cases taxation in the form of withholding tax will be ceded by the source territory.

Following the introduction of the new CFC rules, a number of groups have adopted a CFC structure very similar to the one involving a Luxembourg or Dutch conduit, but instead using a UK company as a conduit.

The UK conduit company will receive the interest free loan from Ireland (or a similar territory that does not apply transfer pricing rules to interest receipts) and then lend on to the ultimate debtor. Just as for a CFC, the UK conduit company can claim a compensating adjustment under the transfer pricing rules in respect of the adjustment made by the Irish CFC (the imputation of interest on the interest free loan) in calculating its assumed taxable total profits. This will leave the UK conduit company with only a very small margin which is liable to tax.

There may be a number of reasons why a UK company is used as the conduit. This may or may not include using the UK company to avoid another territory’s withholding tax. This is a matter for the other territory to consider and take action if they deem appropriate. However, as the UK will inevitably have a double taxation agreement with that territory, HMRC will generally provide information about the arrangement to the other territory under the exchange of information article in the treaty. HMRC won’t look to establish whether there is a motive to avoid another territory’s source taxation, neither will they engage in correspondence with the group about the issue.

Once you become aware of such an arrangement, please send details to the CFC team at CSTD Business, Assets & International. They will then arrange for the information to be passed to the UK Competent Authority and exchanged with the other territory.