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Finance Act 2012

Chapter 5 – The CFC charge gateway: non-trading finance profits

150.Chapter 5 is the charge gateway for non-trading finance profits within the main charging provision at new section 371BA(3)(a). Such profits are any non-trading finance profits that are included within the CFC’s assumed total profits for the accounting period, so far as they fall within one of more of new sections 371EB to 371EE. These sections apply where the CFC has non-trading finance profits derived from one or more of the following categories:

  • UK SPFs;

  • UK capital investment;

  • arrangements (typically loans) with the UK; and

  • UK finance leases.

151.Non-trading finance profits are defined in new section 371VG(1) to (3). They are profits from loan relationships which would be chargeable to corporation tax under section 299 of CTA 2009 and non-exempt distributions within Part 9A of CTA 2009. Non-trading finance profits also include profits arising from a relevant finance lease as defined at new section 371VA.

152.Section 371CE(2) also provides for the trading finance profits of a group treasury company to be treated as non-trading finance profits where a notice is issued to an Officer of HM Revenue and Customs. This rule enables a group treasury company that has trading finance profits to access the non-trading finance profits rules at Chapter 5 (and the finance company exemptions within Chapter 9). Once a notice has been issued the deemed non-trading finance profits become chargeable profits of a CFC only if they fall within one or more of new sections 371EB to 371EE.

153.New section 371EB includes within Chapter 5 any non-trading finance profits that are attributable to UK activities. The profits are calculated by applying Steps 1 to 5 and 7 at section 371DB to the CFC’s non-trading finance profits. By excluding Step 6 of that section from the calculation, profits are brought into charge without the limitation imposed by section 371DC for cases where less than 50 per cent of the SPFs attributable to managing the asset or risk associated with the non-trading finance profits are UK SPFs.

154.New section 371EC includes within Chapter 5 any non-trading finance profits so far as they arise from the investment of “relevant UK funds or other assets”. For these purposes “UK funds” are monetary assets and “other assets” are non-monetary assets.

155.The calculation of the profits that pass through the CFC charge gateway by virtue of the profits falling within Chapter 5 takes account of any expenditure or deduction that would be taken into account in calculating the CFC’s assumed total profits. In arriving at the amount of non-trading finance profit that is attributable to capital investment from the UK new section 371EC(2) and (3) allow for an additional deduction that represents the difference (if any) between the arm’s length fund management fee that it is reasonable to suppose would be charged for managing the funds or assets and the management expenditure actually incurred in realising the non-trading finance profit.

156.New subsection (4) defines “relevant UK funds or other assets” as funds derived, directly or indirectly, from:

  • a UK connected company’s subscription for shares in, or other type of capital contribution to the CFC;

  • any amounts included within the CFC’s chargeable profits for any earlier accounting period to which new Part 9A applied (which are the profits that form part of the reserves of the CFC, which have been subject to an apportionment in a previous accounting period);

  • any amounts which are left out of account in determining the CFC’s assumed total profits for that or any earlier accounting period to which new Part 9A applied due to a claim under section 174 TIOPA (transfer pricing: claims by disadvantaged person); or

  • any other funds or other assets received by the CFC directly or indirectly from a UK connected company except (by virtue of subsection (5)) a payment for the provision of goods or services, or sums received by way of a loan from the UK to the CFC.

157.New subsection (6) defines “UK connected company” for the purposes of subsection (4) and includes the UK permanent establishment of a non-UK connected company.

158.New section 371ED includes non-trading finance profits to the extent that they arise from an arrangement, directly or indirectly with a UK resident company connected with the CFC, or to UK permanent establishments of non-UK companies connected with the CFC. An arrangement will typically be a loan to a UK resident company. An example of an indirect arrangement would be a loan from the CFC to a non-UK resident person, who then makes a loan to a UK resident company that is connected with the CFC.

159.Profits from such an arrangement are included in Chapter 5 if it is reasonable to suppose that the arrangement has been made as an alternative to making a dividend or other form of distribution, directly or indirectly, to the UK and that the main reason or one of the main reasons for adopting the alternative arrangement is a reason relating to any UK or non-UK tax liability. This test focuses on the reason why the arrangement was made rather than a dividend being paid (or any other distribution being made) to the UK. The section will therefore apply, for example, to profits arising from a loan made by the CFC to the UK to repatriate funds if a loan was made because a dividend paid to the UK would have attracted withholding tax.

160.New section 371EE includes non-trading finance profits within Chapter 5 where they arise from the direct or indirect relevant finance lease of an asset to a UK resident company or UK permanent establishment of a non-UK company that is connected to the CFC. The rule is limited to those cases where it is reasonable to suppose that the main reason or one of the main reasons for entering into the lease rather than directly or indirectly purchasing the asset is a UK or non-UK tax reason. This test focuses on the reason why a lease was entered into in preference to another means of obtaining the use of the asset.

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