Corporation Tax Act 2009

Issuers of securities with embedded derivatives: deemed contracts for differences U.K.

656 Introduction to section 658 U.K.

(1) Section 658 (chargeable gain or allowable loss treated as accruing) 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 debtor relationship of the company.

(3) Condition B is that the derivative contract—

(a) is treated as a contract for differences by section 585(3) (contract treated as option, future or contract for differences), and

(b) is not within section 652.

(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 shares.

(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 the debtor relationship in the ordinary course of that business.

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

(8) For the meaning of “exactly tracking contract”, see section 657.

657 Meaning of “exactly tracking contract” in section 656 U.K.

(1) This section applies for the purposes of section 656.

(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 proceeds of issue of the liability which represents the debtor relationship mentioned in section 656(2).

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

(a) the period between—

(i) the date when the liability representing that debtor relationship came into existence, and

(ii) the date when the creditor relationship corresponding to that debtor 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 the liability representing that debtor relationship.

658 Chargeable gain or allowable loss treated as accruing U.K.

(1) Subsection (2) applies if—

(a) the debtor relationship mentioned in section 656(2) comes to an end, and

(b) an amount (“the discharge amount”) is paid to discharge all the company's obligations under that relationship.

(2) For the purposes of corporation tax on chargeable gains, a chargeable gain or allowable loss equal to the amount mentioned in subsection (3) is treated as accruing to the company.

(3) That amount is the amount of the gain or loss (as the case may be) which would accrue on the assumptions in subsection (4).

(4) Those assumptions are that—

(a) the derivative contract is an asset of the company,

(b) there is a disposal of that asset at the time when the debtor relationship comes to an end,

(c) the consideration for the disposal of that asset is equal to the relevant amount, and

(d) the cost of the asset is equal to the discharge amount.

(5) In subsection (4) “the relevant amount” means—

(a) if the company was a party to the debtor relationship at the time it was created, the amount of the proceeds of issue of the security representing that relationship, or

(b) if the company became a party to the debtor relationship after that time, the amount of the [F1 tax-adjusted carrying value] of the host contract at that time.

(6) In this section “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.

Textual Amendments

F1 Words in s. 658(5)(b) substituted (with effect in accordance with Sch. 7 Pt. 6 of the amending Act) by Finance (No. 2) Act 2015 (c. 33), Sch. 7 para. 83