Corporation Tax Act 2009 section 645

Creditor relationships: embedded derivatives which are options

Section 645 sets out the conditions under which an embedded derivative within a creditor relationship is treated as an option for corporation tax purposes, and removes qualifying corporate bond status from the underlying asset.

• Where a company holds a loan asset (creditor relationship) containing an embedded derivative treated as an option, and the option relates to qualifying ordinary shares or mandatorily convertible preference shares, special tax rules apply
• The section only applies where the creditor relationship is not held for the purposes of a trade carried on by the company, and the company is not an excluded body
• When this section applies, the asset representing the creditor relationship is treated as not being a qualifying corporate bond, which means chargeable gains provisions that would normally apply to qualifying corporate bonds are switched off
• Gains and losses on the derivative element are dealt with under the derivative contracts regime rather than under the loan relationships or chargeable gains rules