CFC and offshore financing exemption – interaction with unallowable purpose rule

CFC and offshore financing exemption – interaction with unallowable purpose rule

Sun 05 Jan 2014

The new CFC rules in Part 9A TIOPA allow groups to establish (or in some cases retain) tax efficient offshore financing arrangements under the finance company exemptions (Chapter 9). Provided the detailed conditions in are met, the CFC charge on UK chargeable companies may be reduced by between 75% and 100%. However depending on the facts and the existing debt structure of the group, the benefit of the CFC partial or complete exemption could be denied by the loan relationships “unallowable purpose” rule.

HMRC has issued supplementary guidance on the interaction of the unallowable purposes rule and the CFC finance company exemption. Where there is material uncertainty as to whether a claim for the finance company exemption would be agreed, HMRC will consider a non-statutory application for clearance, in respect of both proposed transactions and existing arrangements. Clearance applications in respect of proposed transactions will only be considered in cases where the planning is essentially complete, but for the issue of uncertainty identified in the clearance application.

HMRC is at pains to state then never have and will not give clearance as to the application or otherwise of the CTA 2009 s441 “unallowable purpose” rule (formerly ‘para 13’).  However, where HMRC is considering the arrangements as part of a clearance application on another matter, such as the anti-arbitrage rules, it will indicate whether or not it is likely to investigate if the unallowable purposes rule applies.

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