Section 645 Creditor relationships: embedded derivatives which are options
This section applies to a derivative contract of a company for an accounting period if each of conditions A to E is met.
Condition A is that the derivative contract is a relevant contract to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives) because of a creditor relationship of the company.
Condition B is that the derivative contract is treated as an option by section 585(3) (contract treated as option, future or contract for differences).
Condition C is that the underlying subject matter of the derivative contract—
is qualifying ordinary shares, or
is mandatorily convertible preference shares.
Condition D is that the company is not a party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it.
Condition E is that the company is not an excluded body.
Where this section applies to a derivative contract, the asset representing the creditor relationship is treated for corporation tax purposes as not being a qualifying corporate bond.
See also—
section 647 (meaning of certain expressions in this section), and
section 670 (treatment of net gains and losses on exercise of option).
Notes on Part 7
Modifications
- C1
Pt. 7 modified (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), ss. 601, 1184(1) (with Sch. 2)
- C2
Pt. 7 modified (with effect in accordance with s. 148 of the amending Act) by Finance Act 2012 (c. 14), s. 88(1)(2)(7) (with s. 147, Sch. 17)
- C3
Pt. 7 modified by 2007 c. 3, s. 809FZZ(8) (as inserted (with effect in accordance with s. 37(4) of the amending Act) by Finance Act 2016 (c. 24), s. 37(2))
- C4
Pt. 7 modified (for the tax year 2026-27 and subsequent tax years (but in relation to investment management services whenever performed)) by 2005 c. 5, Sch. A1 para. 35(6) (as inserted by Finance Act 2026 (c. 11), s. 58(6), Sch. 11 para. 1)