Corporation Tax Act 2009 section 695

Transfers of value to connected companies

Section 695 requires a company to recognise a taxable credit when it pays a connected company for an option that is then allowed to lapse, wholly or partly, transferring value to the connected company.

• Where a company pays a connected company for an option and then fails to exercise some or all of the rights under it, a credit must be brought into account
• The credit equals the amount originally paid for the option, reduced by any portion fairly attributable to rights that were actually exercised
• The rule only applies where the connected company granting the option is not itself subject to corporation tax on the derivative contract — for example, because it is not UK resident
• Two companies are connected if one controls the other or both are controlled by the same person, but not merely because both are controlled by the Crown, a government department, a foreign sovereign power, or an international organisation