Corporation Tax Act 2009 section 695A

Disguised distribution arrangements involving derivative contracts

Section 695A targets arrangements where companies in the same group use derivative contracts to transfer profits between them in a way that amounts to a disguised distribution, and prevents the tax deductions that would otherwise arise from such arrangements.

• Where two group companies enter into derivative contract arrangements that result in a transfer of all or a significant part of one company's (or a fellow group member's) profits to the other, and the arrangements are not of a kind that would be entered into in the ordinary course of business, the section applies to deny tax relief.
• Debits (losses or expenses) arising from the derivative contracts that relate to the profit transfer are disallowed — neither the paying company nor the receiving company can bring them into account for corporation tax purposes.
• Credits (gains or income) arising from the same contracts and relating to the same profit transfer are also excluded from the tax computation, but only up to the amount of the disallowed debits — any excess credits remain taxable.
• However, the exclusion of credits does not apply where the credits arise from arrangements whose main purpose (or one of whose main purposes) is to secure a tax advantage for any person — in that case, the credits will be brought into account and taxed.