Corporation Tax Act 2009

Issuers of securities with embedded derivatives: equity instruments

665 Introduction to section 666

(1) Section 666 (allowable loss treated as accruing) applies to a company for an accounting period if each of conditions A to F is met.

(2) Condition A is that the company is treated as a party to a relevant contract under section 585(2) (loan relationships with embedded derivatives) because of a debtor relationship of the company.

(3) Condition B is that the division mentioned in section 585(1) (loan relationships with embedded derivatives) in the case of the debtor relationship is between—

(a) rights and liabilities under a loan relationship, and

(b) rights and liabilities under an equity instrument of the company.

(4) Condition C is that the relevant contract is treated as an option by section 585(3) (contract treated as option, future or contract for differences).

(5) Condition D is that the company pays an amount in the accounting period to the person who is a party to the debtor relationship as creditor in discharge of any obligations under that relationship.

(6) Condition E is that at the time when the company became a party to the debtor relationship—

(a) it was not carrying on a banking business or a business as a securities house, or

(b) if it was carrying on such a business, it did not become a party to that relationship in the ordinary course of that business.

(7) Condition F is that the company is not an excluded body.

(8) In this section “option” is to be construed as if section 580(2) and (3) (meaning of “option”) were omitted.

666 Allowable loss treated as accruing

(1) If A exceeds B, an allowable loss equal to the amount of the excess is treated as accruing to the company in the accounting period for the purposes of corporation tax on chargeable gains.

(2) In this section—

• A is the amount paid as mentioned in section 665(5) reduced (but not below nil) by an amount equal to the fair value of the host contract at the time that amount is paid,

• B is the amount treated as the carrying value of the relevant contract mentioned in section 665(4) at the time the company became a party to the debtor relationship mentioned in section 665(2), and

• “the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the debtor relationship.