What does section 371HA of TIOPA 2010 do?

Section 371HA establishes the basic rule for determining which profits of a controlled foreign company fall within Chapter 8 (the banking chapter) and are potentially subject to the CFC charge. It does this by deducting the relevant profits amount from the CFC's assumed total profits, with only the excess being caught.

How is the relevant profits amount calculated under section 371HA?

The relevant profits amount is calculated by treating the CFC as if it were an overseas permanent establishment (branch) of the relevant UK resident company or bank. The CFC's accounting period is treated as a relevant accounting period of that UK entity for the purposes of the permanent establishment exemption rules in CTA 2009.

What is the practical effect of the basic rule in section 371HA?

The practical effect is that profits which would have been exempt from UK corporation tax had the CFC been structured as an overseas branch are excluded from the CFC charge under Chapter 8. Only profits exceeding the permanent establishment exemption amount are brought into charge, targeting genuinely diverted profits.

Can you give an example of how the Chapter 8 basic rule applies to a UK bank's CFC?

If a UK bank's CFC subsidiary has assumed total profits of £10 million and the relevant profits amount (calculated as if the CFC were an overseas branch) is £6 million, the profits falling within Chapter 8 are £4 million. That £4 million may be subject to the CFC charge; the £6 million is excluded.

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

The basic rule

Section 371HA establishes the basic rule for identifying which of a controlled foreign company's profits fall within Chapter 8 (the banking chapter) and are therefore potentially subject to the CFC charge.

The profits caught by Chapter 8 are those included in the CFC's assumed total profits that are not also covered by its "relevant profits amount".
The "relevant profits amount" is calculated by treating the CFC as if it were an overseas permanent establishment of the relevant UK resident company or UK resident bank.
The CFC's accounting period is treated as a relevant accounting period of that UK company or bank for the purposes of the permanent establishment exemption rules.
In effect, the rule targets profits that would not qualify for the foreign permanent establishment exemption if the CFC were simply an overseas branch of the UK parent.

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