Introduction Limit on double taxation relief in cases involving qualifying loan relationships of CFCs
13.Paragraphs 10 to 14 of the Schedule limit double taxation relief given by way of credit against corporation tax, or by deduction in calculating corporation tax profits in certain circumstances involving qualifying loan relationships of CFCs.
14.Paragraph 12 inserts new section 42(5) that makes clear that the limitation provided by new section 49A is an additional limitation to double taxation relief to that provided for by section 42.
15.Paragraph 13 inserts new section 49A after section 49. New sections 49A(1)(a)-(c) identify the circumstances under which this section will apply.
16.New section 49A(1)(a) provides that section 49A will take effect only if a claim has been made under Chapter 9 of Part 9A TIOPA in relation to an accounting period of the CFC. A Chapter 9 claim is for partial or full exemption from a CFC charge for certain non-trading finance income profits that arise on a loan relationship between two non-UK resident group companies.
17.New section 49A(1)(b) stipulates that in that period there needs to be a qualifying loan relationship between the two CFCs (the “Creditor CFC” in respect of which a Chapter 9 claim has been made and an “Ultimate Debtor” CFC).
18.New section 49A(1)(c) requires that the UK resident company (“the relevant UK company”) has profits which include loan relationship credits in the period which originate directly or indirectly from “Loan B”. “Loan B” is defined by the new CFC rules. Where “Loan B” is made by a person out of funds provided directly as a loan from the “Creditor CFC” or where for example another person is interposed between the “Creditor CFC” and the first person and provides the funds in such a way that the loan made by the “Creditor CFC” would be a qualifying loan relationship (as defined in Chapter 9 of Part 9A), then the condition in new section 49A(1)(c) is met.
19.New section 49A(2) limits entitlement to double taxation relief by way of credit under Part 2 TIOPA to a relevant UK company that has loan relationship credits that have been subject to foreign tax. This section further limits the credit entitlement by reference to the formula:
20.New section 49A(3) states that the limit introduced by this new section applies in addition to the limits to credit against corporation tax specified in section 42(2).
21.New section 49A(4) provides the steps for the calculation of the relevant UK company’s share of the relevant profit amount for the relevant period (“S” in the above example).
Step 1 - ascertains the loan relationship credits in the period from “Loan B”
Step 2 - establishes the loan relationship credits of the Creditor CFC’s qualifying loan relationship and subtracts this sum from the amount established in Step 1 above. This is the relevant profit amount.
Step 3 - the relevant profit amount is allocated between all the persons in the lending chain in a way that seems the most reasonable.
Example
CFC A (Creditor CFC) lends (Loan A) to UK Company (Relevant UK Company) that in turn lends (Loan B) to CFC B (Ultimate Debtor CFC). In the relevant period:
	UK Company has interest receivable of 100 on Loan B from CFC B (Ultimate debtor CFC),
	CFC A (CFC Creditor) has interest receivable of 90.
The relevant profit amount is therefore 10 which would be apportioned to UK Company in the lending chain.
22.New section 49A(5) determines the persons amongst whom the relevant profit amount is apportioned. It includes the person who made “Loan B” and any other person in the lending chain between the Creditor CFC and the “Loan B” lender. It includes anyone who has made or received a loan in that lending chain, for example a person who has received a loan and then passes the funds on as an investment by way of preference shares in another company in the lending chain. It also includes persons who only provide part of the funds for “Loan B”.
23.New sections 49A(6)(a)(i) and (ii) provide a limitation to the amount of “Loan B” where that loan is not wholly funded by “Loan A” provided by the Creditor CFC, or where “Loan B” is used to make a further loan to another person.
24.New section 49A(6)(b) defines “loan relationship credit” in line with a loan relationship credit under Part 5 of CTA 2009. The definition is extended to persons in the lending chain who are not liable to corporation tax, by assuming they are a UK resident company within the charge to corporation tax.
25.New section 49A(6)(c) defines “loan” for the purposes of this section.
26.Paragraph 14 inserts new sections 112(3A) and (3B). These new sections modify the amount of foreign tax that is allowed as a deduction from the income subject to that foreign tax, where a claim for relief by way of credit is not made.
27.New sections 112 (3A)(a) and (b) set out the first two conditions for new section 112(3B) to apply. New subsection (a) mirrors the conditions which trigger S49A to act. New subsection (b) applies if the loan relationship credits received by the relevant UK company have had foreign tax paid in respect of those credits.
28.New section 112 (3A)(c) sets out the third condition for new section 112(3B) to apply. It modifies the amount of foreign tax that can be deducted in section 112(1) to take account of any repayment of the foreign tax, reducing the amount to be considered for deduction to the net amount after any repayment. It does this by defining Z as that net amount and compares whether Z exceeds the amount R × S, where
	R is the rate of Corporation Tax payable by the Company (before any credit relief)
	S is(a)the UK resident company’s share of the relevant profit amount or(b)the proportion of the UK resident company’s share of the relevant profit amount that arises in the relevant period,
as determined in accordance with new section 49A.
If Z were for example nil (because all the foreign tax had been repaid), then Z would not exceed RxS and so the third condition would not be met. In that case the amount of foreign tax deducted in section 112(1) would be nil because of the application of section 112(3). Alternatively if Z equals the amount of the foreign tax deducted (because there is no repayment of foreign tax) then the third condition is met and the limitation in new section 112(3B) applies.
29.New section 112(3B) limits the deduction from income for foreign tax by reference to the formula RxS.
30.In section 112(6) “this section” is inserted in place of “subsection 1”.