Taxation (International and Other Provisions) Act 2010 section 371CD

Incidental non-trading finance profits: the further 5% rule

Section 371CD provides a secondary 5% test that can still exempt a CFC from the Chapter 5 non-trading finance profits charge where the CFC has already failed the initial 5% test under section 371CC.

• This section applies where a CFC meets the basic conditions of section 371CC (carrying on a trade or property business and having non-trading finance profits) but its non-trading finance profits exceed 5% of its trading or property income, meaning it fails the initial 5% test
• Chapter 5 (the non-trading finance profits charge) will still not apply if the CFC's "adjusted" non-trading finance profits — that is, its non-trading finance profits excluding those arising from the investment of funds held for its trade or property business — are no more than 5% of its exempt distribution income
• The adjusted non-trading finance profits strip out profits that are genuinely incidental to the CFC's trade or property business, focusing the test only on finance profits that are not connected to those activities
• Where a CFC subsidiary's non-trading finance profits have been added to the CFC's totals for the initial section 371CC test, those same subsidiary profits must also be included in the adjusted non-trading finance profits used for this further 5% test