CFM9805 - Taxing forex: special rules: non arm's length debt
Overview
FA02/SCH9/PARA11A replaces the non arm's-length provisions that
were previously in FA93/S136 and 136A. Para 11A employs a
fundamentally different approach to FA 1993, and is more precisely
targeted. A new sub-paragraph, FA96/SCH9/PARA11 (3A), makes it
clear that Para 11A, and not Para 11 applies to exchange gains and
losses.
Para 11A is intended to apply primarily to
- borrowings by a thinly capitalised UK company (there is a full discussion of thin capitalisation in the International Manual, INTM560000+), and
- loans made by a UK company to an overseas subsidiary which fulfil an equity function.
Circular, loss multiplying or otherwise abusive transactions
that manipulate exchange gains and losses for avoidance purposes
are more likely to come within the unallowable purposes rule, see
CFM9830.
Para 11A applies in -four situations:
- Where a company has a debt liability (a debtor loan relationship) and all or part of the interest on the debt is treated as a distribution by ICTA88/S209 (2)(e)(vii), or for periods beginning before 1 April 2004, by ICTA88/S209(2)(da). This is explained further at CFM9810.
- Where a company has a debtor loan relationship, and interest (or other outgoings or losses) on the debt are either wholly or partly restricted for tax purposes under the transfer pricing provisions of Sch 28AA ( CFM9815).
- Where a company has lent money (a creditor loan relationship) and either the loan would not have been made at all between parties dealing at arm's length, or a lower amount would have been lent ( CFM9820).
- Where a company would be treated as having a debtor relationship if a claim were made under ICTA88/SCH28AA/PARA6D(2) and there is a connection between this company and the creditor company ( CFM9827).
The provisions applying to exchange gains and losses on debtor loan relationships differ from those applying to creditor relationships.
