Corporation Tax Act 2009

Derivative contracts to which sections 640 and 641 apply

643 Contracts relating to land or certain tangible movable property

(1) This section applies to a derivative contract of a company for an accounting period if conditions A, B and C are met.

(2) Condition A is that the underlying subject matter of the derivative contract consists of either or both of the following—

(a) land,

(b) tangible movable property, other than commodities which are tangible assets.

(3) Condition B is that the company is not a party to the derivative contract at any time in the accounting period for the purposes of a trade carried on by it.

(4) Condition C is that the company is not an excluded body.

(5) For the case where the underlying subject matter of a derivative contract also includes income from property within subsection (2)(a) or (b), see section 644.

644 Income to be left out of account in determining whether section 643 applies

(1) This section applies if the underlying subject matter of a derivative contract includes income from property within section 643(2)(a) or (b).

(2) If that income is subordinate income, it is left out of account in determining for the purposes of section 643 whether condition A is met.

(3) Income is “subordinate income” if it is—

(a) subordinate in relation to so much of the underlying subject matter of the derivative contract as consists of property within section 643(2)(a) or (b), or

(b) of small value in comparison with the value of the underlying subject matter as a whole.

(4) For the purposes of this section, whether part of the underlying subject matter of a derivative contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the contract.

645 Creditor relationships: embedded derivatives which are options

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to E is met.

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

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

(4) Condition C is that the underlying subject matter of the derivative contract—

(a) is qualifying ordinary shares, or

(b) is mandatorily convertible preference shares.

(5) Condition D is that the company is not a party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it.

(6) Condition E is that the company is not an excluded body.

(7) Where this section applies to a derivative contract, the asset representing the creditor relationship is treated for corporation tax purposes as not being a qualifying corporate bond.

(8) See also—

(a) section 647 (meaning of certain expressions in this section), and

(b) section 670 (treatment of net gains and losses on exercise of option).

646 Exclusions from section 645

(1) Section 645 does not apply to a derivative contract of a company for an accounting period if condition A or B is met in the period.

(2) Condition A is that the rights and liabilities which fall to be treated as comprised in the derivative contract are such that the extent to which shares may be acquired in accordance with them is to be determined using a cash value—

(a) which is specified in the contract for the asset representing the creditor relationship mentioned in section 645(2), or

(b) which is or will be ascertainable by reference to that contract.

(3) Condition B is that the rights and liabilities which fall to be treated as comprised in the derivative contract are such that—

(a) the company is entitled or obliged to receive a payment instead of the shares which are the underlying subject matter of the derivative contract, and

(b) the amount of that payment differs by more than an insignificant amount from the value of the shares which the company would be entitled to acquire in accordance with those rights and liabilities at the time it became entitled or obliged to receive the payment.

647 Meaning of certain expressions in section 645

(1) This section applies for the purposes of section 645.

(2) “Mandatorily convertible preference shares” means shares which—

(a) represent the creditor relationship mentioned in section 645(2),

(b) are not qualifying ordinary shares, and

(c) are issued upon terms which stipulate that they must be converted into, or exchanged for, qualifying ordinary shares by a relevant time.

(3) In subsection (2) “relevant time” means a time no more than 24 hours after the acquisition of the shares by a person who, immediately before that acquisition, had the creditor relationship.

(4) “Qualifying ordinary shares” means shares in a company which satisfy conditions A and B.

(5) Condition A is that the shares are all or part of the issued share capital (however described) of the company, other than—

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of the company.

(6) Condition B is that the shares—

(a) are listed on a recognised stock exchange, or

(b) are shares in a holding company or a trading company.

(7) In subsection (6) “holding company” and “trading company” have the same meaning as in section 165 of TCGA 1992 (see section 165A of that Act).

648 Creditor relationships: embedded derivatives which are exactly tracking contracts for differences

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to F is met.

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

(3) Condition B is that the derivative contract is treated as a contract for differences by section 585(3) (contract treated as option, future or contract for differences).

(4) Condition C is that the derivative contract is an exactly tracking contract.

(5) Condition D is that the underlying subject matter of the derivative contract is qualifying ordinary shares listed on a recognised stock exchange.

(6) Condition E is that the company is not a party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it.

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

(8) Where this section applies to a derivative contract, the asset representing the creditor relationship is treated for corporation tax purposes as not being a qualifying corporate bond.

(9) See also section 672 (treatment of net gains and losses on disposal of certain embedded derivatives).

649 Meaning of certain expressions in section 648

(1) This section applies for the purposes of section 648.

(2) “Exactly tracking contract” means a contract where the amount which is to be paid to discharge the rights and liabilities which fall to be treated as comprised in the contract is equal to the amount found by applying R% to C, where—

• R% is the percentage change (if any) over the relevant period in—

  (a)

  the value of the assets which are the underlying subject matter of the contract, or

  (b)

  any index of the value of those assets, and

• C is the amount falling to be regarded in accordance with generally accepted accounting practice as the cost of the asset representing the creditor relationship mentioned in section 648(2) on the date when that asset came into existence.

(3) In subsection (2) “the relevant period” means—

(a) the period between—

(i) the date when the asset representing that creditor relationship came into existence, and

(ii) the date when the debtor relationship corresponding to that creditor relationship comes to an end, or

(b) any other period in which almost all of that period falls, and which differs from that period only for purposes connected with giving effect to a valuation in relation to rights or liabilities under that asset.

(4) “Qualifying ordinary shares” means shares in a company which are all or part of the issued share capital (however described) of the company, other than—

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of the company.

650 Property based total return swaps

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to F is met.

(2) Condition A is that the derivative contract is a contract for differences.

(3) Condition B is that one or more indices are specified in the contract.

(4) Condition C is that at least one index so specified (“the capital value index”) is an index of changes in the value of land.

(5) Condition D is that the underlying subject matter of the derivative contract also includes interest rates.

(6) Condition E is that the company is not a party to the derivative contract at any time in the accounting period for the purposes of a trade carried on by it.

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