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CFC’s non-trade profits: guidance on anti-avoidance

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HMRC has published guidance on the new anti-avoidance measure introduced by Finance Bill 2014, which prevents non-trading finance profits of a CFC from being regarded as a qualifying loan relationship where an arrangement to transfer profits out of the UK exists.

The draft legislation switches off the full or partial exemption rules for loan relationship credits of a CFC that arise from an arrangement with a main purpose of transferring profits from existing intra-group lending out of the UK. If caught by the new rules, those credits are included in full within the CFC’s chargeable profits.

HMRC says that the proposed rules will not affect the ability of businesses to use CFC finance companies for new investment outside the UK or their freedom to restructure existing lending from CFC finance companies.

The draft rules, to be inserted as TIOPA 2010 s 371IH(9A)–(9E), stop a CFC’s creditor relationship from being a qualifying loan relationship if three conditions are met:

  • the UK connected company has or has had a creditor relationship where the debtor is a non-UK resident company connected with the UK connected company. This is the UK creditor relationship;
  • there is a subsequent arrangement (which can include several steps) made directly or indirectly in connection with the UK creditor relationship; and
  • the main purpose, or one of the main purposes, of the relevant arrangement is to secure that: the relevant UK credits of a UK connected company are lower than they would be if the relevant arrangement had not been made; or the relevant UK debits of a UK connected company are greater than they would be if the relevant arrangement had not been made.

The guidance contains examples, including diagrams, of structures which will be caught by the new rules. Most of the examples assume that the purpose of the arrangements is to secure a reduction in UK tax. The guidance stresses that where there is a clear rationale for the arrangements that does not involve UK tax, it is unlikely that the arrangements will be caught. If a clearance is requested, HMRC should give a risk indication in these terms. The examples cover in particular:

  • Replacing a tower structure (commonly used to finance a group’s US operations) with an Irish/UK conduit structure following the implementation of the reformed CFC rules in January 2013. Although the structures vary, the typical final position is that an Irish CFC makes an interest-free loan to a UK company which makes an interest-bearing loan to another member of the group, typically resident in the US. Under the new rules, a claim under Chapter 9 of the CFC rules will no longer achieve the exemption of the Irish CFC’s profits.
  • One group purchases another using funding from the UK and subsequently decides to use funding in the form of a new loan from a CFC which is inserted in the group structure. Under the new rules, the profits of the CFC are caught, as the new loan relationship is not a ‘qualifying loan relationship’. However, the guidance explains that if it was always intended that the initial UK funding would be temporary, there is no ‘pre-existing arrangement’ and so the new rules do not apply.
  • A group funds its overseas activities using revolving facilities such as overdrafts and restructures its arrangements in order to provide finance to an overseas subsidiary through a CFC. Under the new rules, the loan relationship with the CFC is not a ‘qualifying loan relationship’.