INTM219750 - Controlled Foreign Companies: The CFC Charge Gateway Chapter 9 - Exemptions for profits from Qualifying Loan Relationships: UK company used as a conduit in a CFC shelter: Restriction to Double Taxation Relief by way of credit
The limit to DTR by way of credit is calculated using the formula
R x S
Where
- R is the rate of corporation tax payable by the relevant UK company (before any credit relief).
- S is the UK company’s share of the relevant profit amount (or the proportion of this amount that arises in the period)
The relevant profit amount is calculated by reference to “Loan A” which is the subject of a creditor relationship with the lending CFC and “Loan B” which is made to the Ultimate Debtor and is funded by Loan A. The calculation takes account of any UK company in the lending chain, directly or indirectly.
The relevant profit amount (“S”) is calculated using the following steps:
Step 1 - establish the loan relationship credits in the period from “Loan B”
Step 2 - determine the loan relationship credits of the Creditor CFC’s qualifying loan relationship for the period and then subtracts this sum from the amount established in Step 1 above. This is the relevant profit amount.
Step 3 - where there is more than one company in the lending chain, the relevant profit amount is allocated between all the parties on a just and reasonable basis.
In the link to the first diagram below, Creditor CFC lends (Loan A) to relevant UK Company that in turn lends (Loan B) to the Ultimate Debtor CFC. Ultimate Debtor is obliged to deduct withholding tax on the interest it pays to Relevant UK Company.
In the relevant period
- The UK relevant company has interest receivable of 100 on Loan B from the Ultimate Debtor
- CFC Creditor has interest receivable of 90
The relevant profit amount is therefore 10. If the UK corporation tax rate is 24%, any claim for DTR is limited by the formula R x S and so any DTR claim is limited to 10 x 24% = 2.4
Use this link to view the first example diagram
Where there is more than one conduit in the lending chain, the relevant profit amount is apportioned amongst these persons on a just and reasonable basis. It will include anyone who has made or received a loan in that lending chain (including persons who only provide part of the funds for “Loan B”). The relevant profit amount will also be apportioned to persons who have received a loan but then pass on the funds as an investment by way of preference shares in another company in the lending chain.
In the link to the second diagram below, the facts are the same in the previous example, except there are now two UK companies in the chain and the loan from Creditor CFC is an interest free loan. The first UK Company borrows from Creditor CFC and invests the money in the second UK Company by way of equity. The second UK Company then uses the investment to make a loan to Ultimate Debtor. In calculating its profits for the purposes of the CFC rules, Creditor CFC imputes additional profits of 90 representing an arm’s length amount of interest in respect of the loan it makes to the first UK Company. This in turn means the first UK Company can make a compensating adjustment of the same amount in calculating its profits for tax purposes.
As in the previous example, the relevant profit is 10, and this would all be apportioned to the second UK Company on a just and reasonable basis as it is the second Company that will be taxed on its interest receivable of 100. Any claim for DTR that makes company makes will be limited to relief of 2.4.
Use this link to view the second example diagram
The relevant profit amount will also be apportioned to any CFCs in the lending chain where a just and reasonable apportionment would allocate part of the relevant profit to that company. The share of the relevant profit amount will be calculated on the assumption that they are UK resident, within the charge to corporation tax and consequently in receipt of loan relationship credits (as defined by CTA09/Part 5).