CFM5604 - Taxing loan relationships: connected persons and late interest: major interest

Connection through a major interest

There is a connection under FA96/SCH9/PARA2(1C) where the lender is a company and either

• the lender has a major interest in the borrower, or
• the borrower has a major interest in the lender.

The major interest test is designed to ensure that the legislation covers situations where

• the parties may be able to manipulate mismatches between the taxation of interest paid and received, but
• one party alone does not control the other party.

This is particularly relevant for joint venture arrangements where, say, two otherwise unconnected companies A and B have 50% interests in a company, C. Neither A nor B alone control C, however A and B could together influence when interest is paid.

The legislation applies only where there is potential for both parties to influence the transactions by looking only at situations where

• each party has a 40%-plus interest in its own right, and
• both have either debtor or creditor relationships with the company concerned.

(For accounting periods beginning on or after 17 March 2004, there is no longer a requirement for both parties with a major interest in a company to have debtor or creditor relationships with the company for connection to be established.)

There are details at CFM5605.

Where a partnership is involved, see CFM5883.