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

Exclusions from definition of "qualifying loan relationship"

Section 371IH sets out the circumstances in which a CFC's creditor relationship will not qualify as a "qualifying loan relationship" for the purposes of the CFC exemption for loan relationship profits, even if it would otherwise meet the definition.

• A CFC's loan cannot be a qualifying loan relationship where the borrower (ultimate debtor) already obtains UK tax relief on the interest costs — for example through a UK permanent establishment, UK property business, or foreign PE exemption election.
• A CFC's loan cannot qualify where the borrower is another CFC whose own interest deductions reduce or eliminate its CFC charge, or where the arrangement is designed to fund onward lending or produce a time-value-of-money return (unless the borrower is genuinely in the banking or insurance business).
• A CFC's loan cannot qualify if the funds lent by the CFC were themselves sourced from a connected UK banking or insurance company otherwise than by way of a loan, or from arrangements creating UK trading deductions; nor can it qualify where the loan forms part of a circular or back-to-back structure designed to obtain a tax advantage.
• A CFC's loan also cannot qualify where it is connected to an arrangement that reduces the UK loan relationship credits or increases the UK loan relationship debits of a connected UK company, compared with what those amounts would have been without the arrangement.

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