CTM15510 - Distributions: general: securities within ICTA88/S209 (2)(da)
This page only applies in respect of interest payments made on or before 31 March 2004 as ICTA88/S209 (2)(da) was repealed with effect from 1 April 2004 and replaced by the revised ICTA88/SCH28AA. See INTM506000 onwards for further details.
ICTA88/S209 (2)(da) applies to payments of interest or similar sums made on or after 29 November 1994, except for those relating to securities in respect of which FICO had issued an exemption notice before that date. In such cases, ICTA88/S209 (2)(da) is only effective for payments made after 31 March 1995.
A fuller explanation of the purpose of the legislation and the HMRC approach can be found in the article in TB17B titled ‘Intra-group interest and similar sums treated as distributions’. International CT can advise on any difficulties of interpretation or application. The subject is covered in some detail in the INTM.
ICTA88/S209 (2)(da) applies to interest or similar payments in respect of securities held by connected companies, with no territorial limitation. Companies are connected if:
- the company issuing the security is a 75% subsidiary of the other company,
- both companies are 75% subsidiaries of a third company.
Although there is no territorial limitation, ICTA88/S212 stops ICTA88/S209 (2)(da) applying to interest or similar sums which are within the charge to CT in the hands of the receiving company. Payments to charities are also specifically excluded.
ICTA88/S209 (2)(da) treats as a distribution only that part of the interest or similar payment that exceeds the total of:
- what would have been paid if, apart from the security in question, there had been no relationship, arrangements or other connection between the two companies, and
- any amount already treated as a distribution under ICTA88/S209 (2)(d), and
- any amount representing the principal secured.
The principles to be applied in deciding whether any interest is excessive are set out in ICTA88/S209 (8A) to (8F).
ICTA88/S209 (8A) brings into effect for this purpose what ICTA88/S808A says about the factors to be taken into account when considering the special relationship provisions within Double Taxation Agreements.
ICTA88/S209 (8B), in conjunction with ICTA88/S808A (2) to (4), makes it clear that consideration must be given not only to the amount and terms of the debt, but also to whether a loan would have been made at all.
ICTA88/S209 (8A)(b) clarifies which of the relationships of the borrower may be taken into account for the purposes of ICTA88/S209 (2)(da). These are:
- relationships between the borrower and other persons where there is no relevant connection (defined at ICTA88/S209 (8C)), and
- relationships between the borrower and companies which are members of the same ‘UK grouping’.
ICTA88/S209 (8D) defines ‘UK grouping’. It may consist of:
- just the borrower itself,
- the borrower and its effective 51% subsidiaries,
- the top UK holding company of which the borrower is a 51% subsidiary, together with all that company's 51% subsidiaries (including the borrower).
ICTA88/S209 (8E) defines ‘an effective 51% subsidiary’, and ICTA88/S209 (8F) excludes dual resident companies from being regarded as UK resident for these purposes.