INTM219360 - Controlled Foreign Companies: The CFC Charge Gateway Chapter 9 - Exemptions for profits from Qualifying Loan Relationships: Matched Interest Rule: When does the revised matched interest rule apply?

This guidance applies to periods of account of worldwide groups that begin on or after 1 April 2017 and reflect the changes brought about by the Corporate Interest Restriction rules. There are transitional provisions (not covered here) applying to periods that straddle 1 April 2017, but broadly periods of account straddling this date are treated as two notional periods.

A worldwide group is defined in the Corporate Interest Restriction rules at TIOPA10/Part 10/S473. A worldwide group is a parent and its consolidated subsidiaries. See CFM 95330. The period of account is defined in the Corporate Interest Restriction rules at TIOPA10/S480. The period of account is usually the period in respect of which financial statements are drawn up by or on behalf of the ultimate parent. See CFM95410 for a full description of how to determine the period of account.

The revised Matched Interest rules do not operate in the same way as the original rules. Specifically the new provisions do not permit the exemption of foreign exchange gains from a CFC charge. This is because the Corporate Interest Restriction rules don’t include foreign exchange losses or gains in the definition of tax-interest expense amounts and tax-interest income amounts. (TIOPA10/S383(3)(a) and S386(3)(a).)

The revised matched interest rule in TIOPA10/Part 9A/S371IE applies for an accounting period when:

  1. there remain non-trading finance profits (“NTFPs” - INTM203000) in respect of qualifying loan relationships (“QLRs” -INTM217000) of the CFC that are not exempt after the application of TIOPA10/S371IB and TIOPA10/S371ID; and
  2. (apart from the application of this section) the above profits would be included in the chargeable profits of the CFC

The term “matched interest profits” is used in TIOPA10/S371IE(2)This term means the amounts at 1 above after removing the excluded credits and debits as defined for the purposes of the Corporate Interest Restriction rules (CFM95630).

The term “aggregate net tax-interest expense” is also used in TIOPA10/S371IE(3) and is defined for the purposes of the Corporate Interest Restriction rules at TIOPA10/S390 (CFM95605).The aggregate net tax-interest expense of the worldwide group is based upon the tax-interest expense amounts and tax-interest income amounts of the companies in the worldwide group. This generally relates to income or expenses that are brought in under the loan relationship and derivative contract rules in CTA 2009. Refer to CFM95600 for a full explanation.

TIOPA10/S371IE(3) considers the case where the aggregate net tax-interest expense of the group is nil. In these circumstances all of the matched interest profits are exempted.

In cases where the aggregate net tax-interest expense of the group is not nil and the profits apportioned to the chargeable companies in the worldwide group exceed this then a proportion of the matched interest profits is exempted. The amount exempted is determined by the calculation in TIOPA10/S371IE(5), (6) and (7).

Where the aggregate net tax-interest expense (which is not nil) of the group exceeds the profits apportioned to the chargeable companies in the worldwide group then none of the matched interest profits is exempted

The following examples show how to apply these rules. INTM219370 calculates the amount of the exemption where the aggregate net tax-interest is nil. INTM219380 calculates the amount of the exemption where the profits apportioned to the chargeable companies in the worldwide group exceed the aggregate net tax-interest expense (where this is not nil).

The revised TIOPA10/S371IE(8) provides a limitation that excludes debits, credits and other amounts that arise from UK banking or insurance business in determining what the aggregate net tax-interest expense would be. This to align this limitation with the original matched interest rules