Corporation Tax Act 2009 section 648

Creditor relationships: embedded derivatives which are exactly tracking contracts for differences

Section 648 sets out the conditions under which a derivative contract embedded in a creditor relationship, which takes the form of an exactly tracking contract for differences referenced to listed shares, receives special tax treatment — including the removal of qualifying corporate bond status from the host creditor relationship.

• The section applies where a company holds a creditor relationship containing an embedded derivative that is treated as a contract for differences, and that contract exactly tracks the value of qualifying ordinary shares listed on a recognised stock exchange.
• The company must not hold the creditor relationship for the purposes of a trade it carries on, and it must not be an excluded body.
• Where all conditions are met, the asset representing the creditor relationship is treated as not being a qualifying corporate bond for corporation tax purposes, bringing it within the chargeable gains regime rather than the loan relationships regime for disposal purposes.
• Section 672 provides separate rules modifying how acquisition costs are calculated under chargeable gains rules if the asset representing the creditor relationship is disposed of.