Details of the Schedule
Relevant finance leases
2.Paragraph 3 of the Schedule removes the limitation in section 371ED(1) that excludes non-trading finance profits arising from a relevant finance lease from the scope of section 371ED. This ensures that all non-trading finance profits that arise from either arrangements made as an alternative to paying dividends, or from relevant finance leases are within the scope of Chapter 5 of Part 9A TIOPA.
3.Paragraph 4 amends section 371EE(2)(b) so that the alternative scenario considered is both the purchase (directly or indirectly) of an asset, and an arrangement falling within new section 371EE(3). That section deals with an arrangement whereby a UK company purchases rights to use an asset (such as a licence to use a patent). It provides for two counterfactuals:
An arrangement that involves purchasing the rights to use the relevant asset from a person other than the CFC (and so the arrangement could involve a relevant finance lease provided the CFC was not the lessor); or
An arrangement that involves purchasing the rights to use the asset, but not by way of a relevant finance lease (and so the counterfactual could be an arrangement such as a licence granted by the CFC).
4.Paragraphs 5 and 6 refer to the new definition of “relevant finance lease” in new section 371VIA.
5.Paragraph 7 amends the definition of finance profits in section 371VG.
6.Paragraph 8 amends section 371VH(9) and inserts new section 371IH(10A) to make clear that in determining whether a person has an interest in a CFC by virtue of a loan relationship with embedded derivatives, in a situation where accounts have not been prepared in accordance with generally accepted accounting standards, then that issue will be determined on the assumption that accounts have been prepared in accordance with international accounting standards.
7.Paragraph 9 inserts new section 371VIA (relevant finance leases). The new section has the effect of including all finance leases over assets and arrangements that are of a similar character, within the definition of relevant finance lease.
8.New section 371VIA(1) provides that relevant finance leases are the arrangements that fall within new subsections (2) and (3) and specifies that loan relationships of any company are not included within the definition of relevant finance lease.
9.New section 371VIA(2) identifies arrangements where a lessor provides an asset to be leased, or otherwise made available, to another person. These arrangements are relevant finance leases for the purposes of Part 9A TIOPA where, in accordance with generally accepted accounting practice, they are treated in the accounts of the lessor, or a person connected with the lessor, as a finance lease or loan.
10.New section 371VIA(3) provides that the term relevant finance lease shall also include certain hire-purchase, conditional sale or other arrangements. These arrangements are included where they do not fall within new section 371VIA(2), but are of a similar character to the arrangements that would fall within new section 371VIA(2).
11.New section 371VIA(4) stipulates for the purposes of new section 371VIA, that where the accounts of a person are not drawn up in accordance with generally accepted accounting practice (which is specified as either UK GAAP or international accounting standards), any question that has to be considered by reference to generally accepted accounting practice is determined by assuming that the accounts of the person are prepared in accordance with international accounting standards.
12.New section 371VIA(5) makes clear that for the purposes of this section the “accounts” of a company include accounts that relate to two or more companies of which that company is one and so includes consolidated accounts.
Limit on double taxation relief in cases involving qualifying loan relationships of CFCs
13.Paragraphs 10 to 14 of the Schedule limit double taxation relief given by way of credit against corporation tax, or by deduction in calculating corporation tax profits in certain circumstances involving qualifying loan relationships of CFCs.
14.Paragraph 12 inserts new section 42(5) that makes clear that the limitation provided by new section 49A is an additional limitation to double taxation relief to that provided for by section 42.
15.Paragraph 13 inserts new section 49A after section 49. New sections 49A(1)(a)-(c) identify the circumstances under which this section will apply.
16.New section 49A(1)(a) provides that section 49A will take effect only if a claim has been made under Chapter 9 of Part 9A TIOPA in relation to an accounting period of the CFC. A Chapter 9 claim is for partial or full exemption from a CFC charge for certain non-trading finance income profits that arise on a loan relationship between two non-UK resident group companies.
17.New section 49A(1)(b) stipulates that in that period there needs to be a qualifying loan relationship between the two CFCs (the “Creditor CFC” in respect of which a Chapter 9 claim has been made and an “Ultimate Debtor” CFC).
18.New section 49A(1)(c) requires that the UK resident company (“the relevant UK company”) has profits which include loan relationship credits in the period which originate directly or indirectly from “Loan B”. “Loan B” is defined by the new CFC rules. Where “Loan B” is made by a person out of funds provided directly as a loan from the “Creditor CFC” or where for example another person is interposed between the “Creditor CFC” and the first person and provides the funds in such a way that the loan made by the “Creditor CFC” would be a qualifying loan relationship (as defined in Chapter 9 of Part 9A), then the condition in new section 49A(1)(c) is met.
19.New section 49A(2) limits entitlement to double taxation relief by way of credit under Part 2 TIOPA to a relevant UK company that has loan relationship credits that have been subject to foreign tax. This section further limits the credit entitlement by reference to the formula:
R × S
Where
R is the rate of Corporation Tax payable by the relevant UK company (before any credit relief).
S is
(a)the relevant UK company’s share of the relevant profit amount; or
(b)the proportion of the relevant UK company’s share of the relevant profit amount that arises in the relevant period.
20.New section 49A(3) states that the limit introduced by this new section applies in addition to the limits to credit against corporation tax specified in section 42(2).
21.New section 49A(4) provides the steps for the calculation of the relevant UK company’s share of the relevant profit amount for the relevant period (“S” in the above example).
Step 1 - ascertains the loan relationship credits in the period from “Loan B”
Step 2 - establishes the loan relationship credits of the Creditor CFC’s qualifying loan relationship and subtracts this sum from the amount established in Step 1 above. This is the relevant profit amount.
Step 3 - the relevant profit amount is allocated between all the persons in the lending chain in a way that seems the most reasonable.
Example
CFC A (Creditor CFC) lends (Loan A) to UK Company (Relevant UK Company) that in turn lends (Loan B) to CFC B (Ultimate Debtor CFC). In the relevant period:
UK Company has interest receivable of 100 on Loan B from CFC B (Ultimate debtor CFC),
CFC A (CFC Creditor) has interest receivable of 90.
The relevant profit amount is therefore 10 which would be apportioned to UK Company in the lending chain.
22.New section 49A(5) determines the persons amongst whom the relevant profit amount is apportioned. It includes the person who made “Loan B” and any other person in the lending chain between the Creditor CFC and the “Loan B” lender. It includes anyone who has made or received a loan in that lending chain, for example a person who has received a loan and then passes the funds on as an investment by way of preference shares in another company in the lending chain. It also includes persons who only provide part of the funds for “Loan B”.
23.New sections 49A(6)(a)(i) and (ii) provide a limitation to the amount of “Loan B” where that loan is not wholly funded by “Loan A” provided by the Creditor CFC, or where “Loan B” is used to make a further loan to another person.
24.New section 49A(6)(b) defines “loan relationship credit” in line with a loan relationship credit under Part 5 of CTA 2009. The definition is extended to persons in the lending chain who are not liable to corporation tax, by assuming they are a UK resident company within the charge to corporation tax.
25.New section 49A(6)(c) defines “loan” for the purposes of this section.
26.Paragraph 14 inserts new sections 112(3A) and (3B). These new sections modify the amount of foreign tax that is allowed as a deduction from the income subject to that foreign tax, where a claim for relief by way of credit is not made.
27.New sections 112 (3A)(a) and (b) set out the first two conditions for new section 112(3B) to apply. New subsection (a) mirrors the conditions which trigger S49A to act. New subsection (b) applies if the loan relationship credits received by the relevant UK company have had foreign tax paid in respect of those credits.
28.New section 112 (3A)(c) sets out the third condition for new section 112(3B) to apply. It modifies the amount of foreign tax that can be deducted in section 112(1) to take account of any repayment of the foreign tax, reducing the amount to be considered for deduction to the net amount after any repayment. It does this by defining Z as that net amount and compares whether Z exceeds the amount R × S, where
R is the rate of Corporation Tax payable by the Company (before any credit relief)
S is
(a)the UK resident company’s share of the relevant profit amount or
(b)the proportion of the UK resident company’s share of the relevant profit amount that arises in the relevant period,
as determined in accordance with new section 49A.
If Z were for example nil (because all the foreign tax had been repaid), then Z would not exceed RxS and so the third condition would not be met. In that case the amount of foreign tax deducted in section 112(1) would be nil because of the application of section 112(3). Alternatively if Z equals the amount of the foreign tax deducted (because there is no repayment of foreign tax) then the third condition is met and the limitation in new section 112(3B) applies.
29.New section 112(3B) limits the deduction from income for foreign tax by reference to the formula RxS.
30.In section 112(6) “this section” is inserted in place of “subsection 1”.
Miscellaneous
31.Paragraph 15 substitutes new section 236(4) in TIOPA. It ensures condition B is brought into line with the introduction of Part 9A TIOPA. Condition B, which assists in determining whether the scheme is a deduction scheme for the purposes of the arbitrage rules, shall not be failed solely because the profits of the company in question are treated as taxable on another person by a rule in a territory outside the UK, which is similar to Part 9A TIOPA.
32.Paragraph 16 introduces further amendments to Part 9A TIOPA.
33.Paragraph 17 substitutes new sections 371CE(4) and (5) in TIOPA that determine when a CFC is a group treasury company.
34.New sections 371CE(4)(a) and (b) set out the conditions for a CFC to be a group treasury company. It does this by reference to section 316 TIOPA, as amended by Finance Act 2013 and therefore maintains the alignment of the definition of a group treasury company between the Worldwide Debt Cap rules (see Part 7 TIOPA) and Part 9A TIOPA. While new section 371(4)(a) applies the conditions in new section 316(2), sections 316(9) to (11) are read through as a consequence.
35.New sections 371CE(5)(a) and (b) modify the application of new section 316(2) for the purpose of defining a group treasury company for the purposes of Part 9A TIOPA. New section 371CE(5)(a) removes the need, as it is not relevant for the purposes of the CFC rules, for an election under new section 316(2)(d) to be made. The Worldwide Debt Cap rules only apply to groups that are large. New section 371CE(5)(b) removes this restriction, in order for a group that is not large to be able to issue a notice under section 371CE(2).
36.Paragraph 18 introduces paragraphs 19 and 20 which contain amendments to Chapter 9.
37.Paragraph 19 inserts new sections 371IB(9A)-(9D). New section 371IB(9A) switches off in two sets of circumstances the limitation to what are qualifying resources provided by section 371IB(9). That rule limits the amount of qualifying resources where the qualifying loan relationship is part of an arrangement that results in an increase in debt in the UK of members of the group.
38.New section 371IB(9B) sets out the conditions for the first set of circumstances and switches off section 371IB(9) when any UK debt identified by section 371IB(8) is repaid within 48 hours of it being made.
39.New section 371IB(9C) provides a purpose based test which stops the application of new section 371IB(9B), where arrangements are made to effectively extend the relaxation of section 371IB(9) beyond 48 hours, or where the main purpose of the loan is to obtain the relaxation of section 371IB(9). It applies where the loan repayment occurs under, or is connected (directly or indirectly) with, an arrangement which has as its main purpose, or one of its main purposes, to ensure the section 371IB(9) restriction does not apply because of:
the loan, or
any other debt which a member of the CFC group incurs (or is expected to incur) in the UK.
40.New section 371IB(9D) sets out the conditions for the second set of circumstances where section 371IB(9) won’t apply to limit the level of qualifying resources. It applies where an amount of short-term debt is repaid out of the proceeds of the issue of ordinary non-redeemable shares by the parent company to persons who are not members of the CFC group.
41.New sections 371IB(9D)(a) – (d) set out the conditions for switching off section 371IB(9) in those circumstances. These are:
there must be an issue of shares that meets the requirements of sections 371IB(7)(c)(i)-(iii);
there must be an expectation that the UK debt incurred before the issue of those shares, would be repaid by the company from the funds derived (directly or indirectly) from the issue of those shares;
that the above repayment is made within 6 months from the day on which the loan is incurred, and
the loan was neither made by a person who was a member of the CFC group, nor was it (wholly or partly and directly or indirectly) funded by a member of the CFC group.
The final condition ensures that new section 371IB(9D) only applies where the short-term funding has been provided by a third party and not as part of an arrangement whereby some or all of the funding is provided by the CFC group.
42.Paragraph 20 amends the matched interest rules at section 371IE.
43.Paragraph 20(2) amends the condition at section 371IE(1)(d)(ii). It ensures that the condition will be met where, if it were not for the application of section 371IE, some or all of the leftover profits within section 371IE are treated, by section 314A(1)(d), as relevant finance profits for the purposes of the Worldwide Debt Cap. This in turn ensures that the amount of leftover profits that can be exempted by the matched interest rule is not limited to only those profits that are treated as financing income amounts by section 314A. This will mean for example that the loan relationship credit from a FOREX gain that forms part of a CFC’s non-trading finance profits can potentially be exempted under the matched interest rule.
44.Paragraph 20(3) inserts new section 371IE(7A). This makes clear that the amounts of leftover profits referred to in section 371IE(6) shall only include the leftover profits that fall to be included in the relevant finance profits amount of section 314A(1)(d). This ensures that the calculation of the proportion of leftover profits that can exempted under the matched interest rule is made using only those leftover profits that would otherwise be treated as financing income amounts under section 314A.
Commencement and transitional provision
45.Paragraph 21 states that the amendments made by this Schedule come into force on 1 January 2013.
46.Paragraph 22 introduces a transitional rule for the group treasury company notice within section 371CE (as amended by Finance Act 2013). The transitional rule applies to accounting periods of CFCs that begin before 20 March 2003.
Accounting periods ending before 20 March 2013
47.Paragraph 22(2) amends section 371CE by omitting section 371CE(4)(b). This means that for accounting periods that begin on or after 1 January 2013 and end before 20 March 2013, the definition of a group treasury company for the purposes of Part 9A excludes the new restriction on the definition of a group treasury company for the purposes of the Worldwide Debt Cap that is introduced in Finance Act 2013.
Accounting periods ending on or after 20 March 2013
48.Paragraph 22(3) introduces the transitional rule for accounting periods beginning before and ending on or after 20 March 2013, for CFCs that will meet the updated definition of a group treasury company after 20 March 2013, but not before.
49.Paragraph 22(4) allows a notice under section 371CE(2)(b) to still be made even though the condition provided by section 371CE(2)(a) is not met.
50.Paragraph 22(5) outlines that where section 371CE(2)(a) is not met but a notice under section 371CE(2)(b) is given, the CFC’s trading finance profits shall be apportioned between two deemed accounting periods on a just and reasonable basis. This apportionment will be between a deemed accounting period ending on 19 March 2013 (“Period A”) and a deemed accounting period representing the period from 20 March 2013 (“Period B”). This sub-paragraph will only apply in practice where the CFC cannot meet the updated definition of a group treasury company before 20 March 2013, but can meet that definition after 20 March 2013. If the CFC can meet the updated definition of a group treasury company throughout its accounting period spanning 20 March 2013 then there is no need to apply paragraphs 22(5) to (9).
51.Paragraphs 22(6) and (7) outline the treatment of the CFC’s trading finance profits apportioned to Period A. Those profits shall be treated as non-trading finance profits if the CFC is a group treasury company in Period A. In determining whether the CFC is a group treasury company in that period a modified section 371CE(4) shall apply, whereby:
references to accounting period are referring to Period A, and
only the group treasury conditions at section 371CE(4)(a) apply.
52.Paragraphs 22(8) and (9) outline the treatment of the CFC’s trading finance profits apportioned to Period B. Those profits shall be treated as non-trading finance profits if the CFC is a group treasury company in Period B. In determining whether the CFC is a group treasury company in that period, section 371CE(4) applies whereby:
references to accounting period are referring to Period B, and
all the group treasury conditions at section 371CE(4) apply.
