INTM218850 - Controlled Foreign Companies: The CFC Charge Gateway Chapter 9 - Exemptions for profits from Qualifying Loan Relationships: Full Exemption - Qualifying Resources: What are Qualifying Resources?: Evidence Required: contents
The legislation is not prescriptive about the nature of evidence required to establish the source of funding of qualifying resources. Where the legislation allows indirect sources of funding to be considered, it will be necessary to consider how the group of companies ultimately obtained the resources used to create the CFC’s loan.
Groups will likely find it easier to restructure financing arrangements going forward and demonstrate clearly that the source of the funds are qualifying resources. However groups will also be looking at existing financial arrangements and the potential for restructuring existing financial arrangements so that intra-group lending is funded from qualifying resources. Demonstrating that funds are derived from qualifying resources in these circumstances will inevitably be more challenging as groups generally won’t have split funding sources in a readily identifiable manner.
In some cases an amount of funding may be obtained from a pool of resources that include both qualifying and non-qualifying resources.
For example:
- a distribution may be made out of profits of which some but not all fall within section 371IB(7)(a);
- a sale of shares may occur when share value is partly attributable to an earlier share for share exchange and partly attributable to other sources of value, such as post acquisition profits or capital contributions;
- an external acquisition that is pushed down to a CFC through steps involving the issue of shares and intra-group debt, may ultimately be funded by a mix of resources such as a rights issue and external borrowings.
In such cases, if there is no evidence to support any particular funding source, the resource must be assumed to include a proportion of all the available funding sources.
In the link to the diagram below, Target is acquired for £1bn, funded by a mix of bank debt (£300m), existing group cash reserves (£100m) and a rights issue (£600m). The shares in Target are pushed down to CFC and then to Hold Co. The loan of £700m to Hold Co is a qualifying loan relationship. The group claim that the loan is funded by the rights issue of £600m and the cash reserves of £100m. However the issue of shares in CFC cannot be split between the three sources so that the loan to Hold Co. can be attributed to particular sources. The three sources of funds have been mixed to acquire Target and cannot be unmixed so as to attribute particular sources to the qualifying loan relationship.
The qualifying loan relationship is treated as though it were funded by £420m from the rights issue, £210m from the bank loan and £70m from the group’s cash reserves. In addition section 371IB (9) states that the amount of non-qualifying resources cannot be less that the amount of UK debts of £300m. So of the potential qualifying resources of £420m there is further restriction of £20m, reducing the qualifying resources to £400m.
In this case UK Plc would make a claim under section 371ID for partial exemption of the profits from the loan from CFC to Hold Co., as this would be more beneficial than a claim under section 371IB.
