Part 7Derivative contracts
Chapter 7Chargeable gains arising in relation to derivative contracts
Derivative contracts to which sections 640 and 641 apply
645Creditor 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).