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Finance Act 2012

Example of Application of IP Condition

140.A CFC holds IP (exploited IP). Some of this IP has been generated by the CFC’s own trading activity. The rest has been transferred to the CFC from a related company in the UK within the past six years.

141.Prior to transfer, the transferred IP was around 40 per cent of the total IP (by balance sheet value) held by the UK related company transferor. The UK derived IP constitutes 25 per cent of the exploited IP of the CFC (by balance sheet value).

142.As a result of the transfer the CFC’s assumed total profits are 30 per cent higher than they otherwise would have been. The assumed total profits of the CFC do include amounts arising from IP – section 371DJ(2)(a).

143.Parts of the exploited IP were transferred from persons related to the CFC during the relevant period – section 371 DJ(2)(b). The related person was a UK related person, so the limitation required by section 371DJ(4) does not apply.

144.As a result of the transfer, the value of IP held by the transferor has been significantly reduced – section 371DJ(2)(c).

145.As only part of the exploited IP has been so transferred, the significance condition has to be considered – section 371DJ(2)(d).

146.The UK derived IP (the transferred IP) is a significant part of the exploited IP, and the profits of the CFC are significantly higher as result of that transfer – section 371DJ(3)(a) and (b). Note that only one of these conditions has to be met in order for the significance condition to be met.

147.Application of section 371DJ in this case means that the IP condition is not met – and therefore the trading profits exclusion cannot apply.

148.New section 371DK provides that the export of goods condition is met if no more than 20 per cent of the total trading income of the CFC arises from goods exported from the UK. However, goods which are exported from the UK into the CFC’s territory of residence are disregarded.

149.New section 371DL provides an anti-avoidance measure for the trading profits exclusion. The section applies if it is reasonable to assume that the various conditions would not have been met in the absence of an arrangement. An arrangement falls within this section if one of the main purposes of an organisation or reorganisation of a significant part of the business of the CFC group is to ensure that one or more of the conditions are met. This includes the 50 per cent asset or risk management expenditure condition (for which see section 371DI).

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