CTM15530 - Distributions: general: exclusion of certain interest or other amounts
ICTA88/S209(2)(e) & ICTA88/S212
ICTA88/S209 (2)(e) can recharacterize interest as a distribution. In some circumstances companies can benefit from this.
For example, there may be a loan agreement that provides for the payment of interest at a fixed rate plus a minute share of the borrowing company's profits. This will fall within ICTA88/S209 (2)(e)(iii) and all the interest will be treated as a distribution. The consequences are that, overall, the parties could be better off at the Revenue’s expense as:
- the borrower will get no relief for the interest paid,
- the lender will receive the interest as franked investment income rather than taxable income.
ICTA88/S212 prevents this happening. It stops a company treating interest or other amounts paid to another company within the charge to CT as a distribution within any part of ICTA88/S209 (2)(e), apart from parts (iv) or (v).
This legislation aims to counter the contrived use of ICTA88/S209 (2)(e) for tax avoidance by arranging for what is in substance interest to be treated as a distribution by being brought within its terms. But it applies whenever its terms are met, not just if avoidance is present.
ICTA88/S212 (1) applies to any interest or other distribution which:
- is paid to another company within the charge to CT,
- is paid in respect of securities within ICTA88/S209 (2)(e) (other than Parts (iv) or (v)),
- does not fall within ICTA88/S209 (2)(d).
Such interest or other distribution is not treated as a distribution unless the application of ICTA88/S212 (1) is excluded by:
- ICTA88/S212 (2) (the transitional provisions),
- ICTA88/S212 (3).
ICTA88/S212 (3) prevents ICTA88/S212 (1) applying where the recipient of the distribution is exempt from tax on the distribution, unless the exemption is under ICTA88/S208.