Introduction Details of the Schedule Part 1.Controlled Foreign Companies Chapter 3 - The CFC charge gateway: determining which (if any) of Chapters 4 to 8 apply
49.Chapter 3 of Part 9A applies for the purposes of Step 1 of section 371BB in order to determine which (if any) of Chapters 4 to 8 need to be considered in determining whether any of a CFC’s profits pass through the CFC charge gateway. If Chapter 3 does not require any of Chapters 4 to 8 to be applied there will be no CFC charge.
50.New section 371CA provides that Chapter 4 (profits attributable to UK activities) will apply for a CFC’s accounting period unless any one of four conditions (A to D) is met.
51.Condition A at new section 371CA(2) is met if the CFC does not, at any time in the accounting period, hold assets or bear risks under an arrangement to which both new subsections (3) and (4) apply. These subsections apply where:
	the main purpose, or one of the main purposes, of the arrangement is to reduce or eliminate any liability of any person to UK tax or duty;
	the CFC expects the arrangement to increase the profits of its business at some time by more than a negligible amount; and
	there is an expectation that one or more persons will have liabilities to tax or duty imposed under the law of any territory reduced or eliminated and it is reasonable to suppose that the arrangement would not have been made without there being that expectation.
52.Condition B at new subsection (5) is met if the CFC has no UK managed assets and bears no UK managed risks at any time during the accounting period.
53.Condition C at new subsection (6) is met if the CFC has itself the capability throughout the accounting period to ensure that its business would be commercially effective if its UK managed assets and risks were to stop being UK managed.
54.New subsection (7) specifies that, for the purpose of Condition C, the required capability includes the CFC being able to select providers of goods and services from persons not connected with it and to manage its transactions with such persons.
55.New subsection (8) requires two assumptions to be made in determining whether Condition C is met at any time during the accounting period. The first assumption is that the CFC would continue to carry on the same business as it is actually carrying on at that time. The other assumption is that none of the relevant UK activities, by which any asset or risk was UK managed, would be replaced by activities carried on by any person connected with the CFC at any time, or in any other way which relied to any extent upon the CFCs receiving resources or other assistance from any person connected with the CFC at any time.
56.New subsection (9) determines that an asset or risk is “UK managed” if any of the functions specified in the subsection are managed or controlled to any significant extent through relevant UK activities.
57.New subsection (10) defines relevant UK activities as activities carried on in the UK either by the CFC itself (unless through a UK permanent establishment) or by companies connected with the CFC. In the latter case the meaning is limited to activities under arrangements which it is reasonable to suppose would not be entered into by companies that were independent of each other.
58.Condition D at new subsection (11) is that the CFC’s assumed total profits only consist of (one or both of):
	non-trading finance profits; or
	property business profits.
59.New section 371CB(1) provides that Chapter 5 (non-trading finance profits) applies for a CFC’s accounting period only if the CFC has non-trading finance profits. This is subject to new sections 371CC and 371CD, which deal with incidental non-trading finance profits. The references to non-trading finance profits in the section and Chapter 5 exclude any profits that fall within Chapter 8 (solo consolidation) or within new section 371CB(3) or (4).
60.New section 371CB(3) excludes profits which arise from the investment of funds held for the purposes of a trade if that trade is carried on by a CFC and no profits of that trade for the accounting period pass through the CFC charge gateway
61.New subsection (4) excludes profits which arise from the investment of funds held by the CFC for the purposes of its UK or overseas property business.
62.New subsection (5) sets out a number of circumstances in which the exclusions in subsections (3) and (4) will not apply. Those exclusions will not apply to non-trading finance profits arising from funds held:
	because of a prohibition or restriction on CFCs paying dividends or making other distributions, except those ceasing to have effect before the end of the “relevant 12 month period”, imposed under:
	the law of the territory in which the CFC is resident;
	the articles of association or other documentation governing the manner in which distributions may be made by the CFC; or
	an arrangement entered into by or in relation to the CFC;
	with a view to paying dividends or other distributions at a time after “the relevant 12 month period”;
(“the relevant 12 month period” is defined in new subsection (7) as being 12 months after the end of the accounting period)
	with a view to acquiring shares in any company, or making a capital contribution to a person;
	with a view to investing in land at a time after the relevant 12 month period;
	only or mainly for contingencies; or
	in order to reduce or eliminate a tax or duty imposed by any territory.
63.New subsection (8) provides that where a chargeable company makes a claim under Chapter 9 (exemptions for profits from qualifying loan relationships) its qualifying loan relationship profits are excluded from the references to non-trading finance profits in this section and in Chapter 5.
64.New section 371CC applies if one or both of the requirements of new section 371CC(1) is met. These are:
65.New section 371CC(2) provides that Chapter 5 will not apply for an accounting period if the CFC’s non-trading finance profits are not more than 5 per cent of the relevant amount, as defined in section 371CC(3).
66.New subsection (3) defines “the relevant amount” with reference to whether one or both of the requirements are met. If (a) is met then the relevant amount is the total of trading or property business profits, as calculated before any deduction for interest or any tax or duty. If (b) is met the amount is the total of the CFC’s exempt distribution income. If both (a) and (b) are met the amount is the sum of the two totals. New subsection (9) defines “exempt distribution income” as any dividends or other distributions which are excluded from the assumed total profits of the CFC because they would be exempt under Part 9A of CTA 2009.
67.New subsections (4) and (5) apply if requirement (b) is met and at any time during the accounting period a 51 per cent subsidiary of the CFC is also a CFC (“the CFC subsidiary”) which has relevant non-trading finance profits determined in accordance with new subsection (6) or (7). In that case the CFC subsidiary’s relevant non-trading finance profits are to be added in with the non-trading finance profits of the CFC for the purposes of testing the 5 per cent limit.
68.New subsections (6) and (7) define the CFC subsidiary’s “relevant non-trading finance profits” with reference to whether it has an accounting period that is the same as or falls wholly within that of the CFC, or if it has an accounting period which otherwise overlaps with that of the CFC.
69.Subsection (6) deals with a CFC subsidiary whose accounting period either matches or falls entirely within the accounting period of the holding company CFC, provided that by virtue of new sections 371CC or 371CD, Chapter 5 does not apply to the CFC subsidiary for the relevant period. The relevant non-trading finance profits of such a CFC are its non-trading finance profits for the relevant period.
70.Subsection (7) deals with a CFC subsidiary whose accounting period overlaps with the accounting period of the holding company CFC, again provided that by virtue of sections 371CC or 371CD, Chapter 5 does not apply to the CFC subsidiary for the relevant period. The relevant non-trade financing profits of such a CFC are a just and reasonable proportion of its non-trading finance profits for that period.
71.New subsection (8) excludes any trading profits that pass through the CFC charge gateway for the accounting period from trading profits for the purposes of this section.
72.New section 371CD applies where both the requirements of section 371CC(1)(a) and (b) are met but the CFC’s tested non-trading finance profits exceed 5 per cent of the relevant amount for the purposes of section 371CC(2). In that case new section 371CD(2) provides that Chapter 5 does not apply for the accounting period if the CFC’s adjusted non-trading finance profits do not exceed 5 per cent of the total of the CFC’s exempt distribution income.
73.New subsection (3) defines the CFC’s adjusted non-trading finance profits as all of its non-trading finance profits less those arising from the investment of funds held for the purposes of the CFC’s trade and/or property business within section 371CB(3) or (4).
74.New subsection (5) applies if a CFC subsidiary’s relevant non-trading profits are added to the CFC’s non-trading finance under section 371CC(5) for the purposes of the test at section 371CC(2). It specifies that the adjusted non-trading finance profits for the test in section 371CD(2) are also to include the CFC subsidiary’s relevant non-trading finance profits.
75.The effect of the further 5 per cent rule at section 371CD for a ‘mixed activity’ CFC not within the 5 per cent limit of section 371CC is that Chapter 5 will apply to any non-trading finance profits that are not incidental to its trade or property business, unless that amount is within 5 per cent of the CFC’s exempt distribution income.
76.New section 371CE provides that Chapter 6 (trading finance profits) applies for a CFC’s accounting period only if the CFC has trading finance profits and at any time during the accounting period the CFC has funds or other assets derived directly or indirectly from UK connected capital contributions.
77.New section 371CE(2) provides that Chapter 6 will not apply and that trading finance profits will be treated as if they were non-trading finance profits if the CFC is a group treasury company in the accounting period who has issued a notice to an Officer of HM Revenue & Customs requesting this treatment.
78.New section 371CE(3) provides that where a group treasury company issues a notice under section 371CE(2) then those profits will not be treated as non-trading finance profits falling within section 371CB(3) and (4). These subsections exclude non-trading finance profits from the application of Chapters 5 and 9 where they have arisen from the investment of funds held for the purposes of an exempt trade or property business. As a result a group treasury company who has issued a notice will also not be able to exclude any of its finance profits under the incidental non-trading finance profit rules in sections 371CC and 371CD.
79.New subsection (4) applies the definition of group treasury company at section 316.
80.The group treasury company notice provisions work in accordance with the worldwide debt cap rules at Part 7. Those rules do not apply to groups that are not large. New subsection (5) ensures that a group that is not large is able to issue a notice under section 371CE(2).
81.New subsections (6) to (8) set out the requirements for issuing a notice under this section, which must be within 20 months after the end of the accounting period or a longer period that an Officer of HM Revenue & Customs may allow.
82.New subsection (7) allows a company to issue a notice if it would be a chargeable company under section 371BC for the accounting period and the percentage of the CFC’s chargeable profits to be apportioned to it would be more than half of the percentage specified in subsection (9).
83.New subsection (8) allows two or more companies to issue a notice if they would be chargeable companies under section 371BC for the accounting period and the percentage of the CFC’s chargeable profits to be apportioned to them, taken together, would be more than half of the percentage specified in subsection (9).
84.New subsection (9) gives the percentage (X%) for the purposes of subsections (7) and (8) as the total percentage of the CFC’s chargeable profits which would be apportioned to chargeable companies if the CFC charge was charged for the accounting period.
85.New section 371CF provides that Chapter 7 (captive insurance business) applies for a CFC’s accounting period only if at any time in that period the main part of its business is insurance business and its assumed total profits include amounts derived from contracts of insurance as specified in new subsection 371CF(2). These are contracts entered into with:
	a UK resident company connected with the CFC;
	a non-UK resident company connected with the CFC and acting through a UK permanent establishment; or
	a UK resident person where the contract is linked to the provision of goods or services to the UK resident person. This excludes services provided as part of insurance business.
86.New section 371CG provides that Chapter 8 (solo consolidation) only applies for a CFC’s accounting period if either of two conditions is met. The first condition is that at any time in the period the CFC is a subsidiary undertaking which is the subject of a solo consolidation waiver under section BIPRU 2.1 of the FSA Handbook, and the CFC’s parent undertaking in relation to that waiver is a UK resident company.
87.The second condition is that at any time in the period the CFC is controlled by a UK resident bank (alone or with other persons) which holds shares in the CFC, and any fall in the value of those shares would be (wholly or mainly) ignored for the purpose of determining whether the UK resident bank meets the requirements of the FSA Handbook in relation to it’s capital. This is limited to where the main purpose, or one of the main purposes, of the UK resident bank in holding the shares is to obtain a tax advantage for itself or any connected company.
88.Solo consolidation is an arrangement whereby the FSA allows a regulated financial company to treat an unregulated subsidiary for regulatory purposes as if it were a division of the regulated company. A company that wishes to solo consolidate must apply to the FSA for a waiver.
89.New section 371CG(4) provides definitions of the terms “FSA Handbook” and “UK resident bank” used in the section. Subsections (5) and (6) provide that the Treasury may by regulations amend the chapter, or Chapter 8, to take account of changes to or replacement of the relevant regulatory publications.