Corporation Tax Act 2009 section 646

Exclusions from section 645

Section 646 sets out two circumstances in which the chargeable gains treatment under section 645 for embedded derivatives that are options does not apply, essentially where the holder is not genuinely exposed to equity risk.

• Section 645 treatment is switched off for an accounting period if either of two conditions is met
• Condition A applies where the number of shares obtainable is determined by a predetermined cash value specified in, or ascertainable from, the host creditor relationship contract
• Condition B applies where the company receives (or must receive) a cash payment instead of shares, and that payment differs by more than an insignificant amount from the market value of the shares it would otherwise have acquired
• Both exclusions target situations where the holder is not truly sharing in the equity risk embedded in the creditor relationship