CFM17415 - MODs: overseas debt securities – treatment of payer

Tax treatment of payer of a MOD on an overseas debt security

Companies

A manufactured overseas dividend in respect of interest on an overseas debt security is treated as interest payable on a loan relationship to which the company is party. Section 97 of FA96 (not paragraph 4 of Schedule 23A) applies to such payments and ensures debits are brought into account in accordance with the loan relationship rules as if the company had paid real interest. The payment will be treated as a trading loan relationship expense if paid for the purposes of its trade and a non-trading loan relationship debit otherwise.

Individuals

Deductibility of the payment will depend on the whether the payment is a legitimate business expense incurred for the purposes of the individual’s trade, profession or vocation. If the payment is not deductible as an expense of a trade, profession or vocation, it is deemed by regulation 2B (3) of SI1993/2004 to be an annual payment (although no tax needs to be deducted). Relief will not then be available because of section 727/728 ITTOIA 2005.