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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: Restriction to Double Taxation Relief by way of deduction to income

Similar restrictions exist where a claim for double taxation relief (DTR) by way of credit is not made and relief is instead permitted as a deduction from the income subject to the foreign tax (under TIOPA10/S112).

The conditions for these rules to apply are the same as where DTR is given by way of credit (under TIOPA10/S49A). The conditions are that there is,

  • a qualifying loan relationship (QLR) between two non UK resident group companies as defined by Section 371IG, and
  • a claim has been made for full or partial exemption under Chapter 9, and
  • one or more UK companies is a conduit to the arrangement.

Where the loan relationship credits received by the relevant UK company have been subject to foreign tax, the DTR by way of deduction under section 112(1) is further restricted by the rules set out in section 112(3B).

The restriction to DTR by way of deduction is determined with reference to the formula:

R x S


  • R is the rate of corporation tax payable by the relevant UK company (before any credit relief).
  • S is the UK company’s share of the relevant profit amount (or the proportion of this amount that arises in the period)

Where there has been a repayment of the foreign tax, the amount to be considered for deduction is reduced by the amount of the repayment. This net amount is defined in the legislation as “Z”.

The net amount “Z” is compared to R x S to determine whether there is any DTR available by way of deduction.

  • Where Z is nil (because all the foreign tax had been repaid), there would be no DTR available by way of deduction.
  • Where Z equals the amount of the foreign tax deducted (because there is no repayment of foreign tax) then the amount of DTR available by deduction is restricted by the formula R x S.