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Corporate interest restriction ‘devil is in the detail’ – CFCs

Corporate interest restriction devil is in the detail

This week’s article looks at some potential impacts of the new regime on controlled foreign companies.


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This is the twenty third in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation was included in Finance (No.2) Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. This week, we focus on how the CIR rules apply to controlled foreign companies (CFCs) and groups containing CFCs which differ significantly from the previous treatment under the worldwide debt cap rules.

Application of the CIR rules in calculating a CFC’s assumed taxable profits
The UK CFC regime can impose a charge to UK tax on all or part of a CFC’s taxable profits (if none of the exemptions or gateways apply to exclude the profits). Because the CFC’s taxable profits are calculated applying UK corporation tax principles, the CIR rules will need to be applied (so as to potentially restrict relief for interest-like expenses incurred by the CFC) in computing these taxable profits. However, for this purpose, the CIR rules are to be applied on the assumption that the CFC is the only UK corporation tax-paying member of a worldwide group and the £2 million de minimis capacity to deduct interest-like expenses is disapplied.

Non-inclusion of the CFC’s income and expenses in computing the group’s UK tax-interest or tax-EBITDA

Having determined the impact of the CIR rules on the CFC’s assumed total profits, an important point to note is that interest-like income and expenses brought into account in calculating those profits are not included in the wider group’s ‘aggregate net tax-interest expense’ for the purposes of the CIR rules, even to the extent that such amounts are effectively subject to UK tax via the CFC charge. Nor are any income or expenses of the CFC included in calculating the group’s aggregate tax-EBITDA. This compares unfavourably to the old worldwide debt cap rules, which included a rule that deemed a CFC’s finance profits to be financing income in calculating the group’s tested expense/income amounts. This means that where, for example, a UK group funds overseas operations using a CFC finance company (qualifying for 75 percent exemption from the UK CFC charge), any net interest income in the finance company will not reduce the group’s overall ‘aggregate net tax-interest expense’ that is potentially subject to disallowance under the CIR rules. Where the group expects to suffer a disallowance of interest expenses under CIR, this means that it may be more efficient to unwind the finance company structure and transfer the overseas funding loan to the UK. The Government have included a special transitional exemption from the regime anti-avoidance rule to facilitate such restructurings.

Amendments to the ‘matched interest’ exemption and ‘group treasury company’ rules

Under the existing UK CFC rules, non-trading finance profits from qualifying loan relationships (within the CFC finance company rules) which would otherwise give rise to a CFC charge may be exempted (in whole or in part) under a so called ‘matched interest rule’, which is currently linked to the worldwide debt cap rules. This provision has now been re-written so that it applies, broadly, to the extent that the CFC’s taxable non-trading finance profits exceed the group’s aggregate net tax-interest expense determined under the CIR rules.

Changes have also been made to the special rules for CFCs which qualify as ‘group treasury companies’ so as to tighten the qualifying criteria that need to be met for this regime to apply.

The previous articles in this series can be found here.

For further information please contact:

Rob Norris

Richard Rudman

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