ICTA88/S419 (1) and 6 provide that, where a close company makes
a loan or advance to a company which is not resident in the United
Kingdom which is a participator, or an associate of a participator,
in the close company, the close company is chargeable to tax on the
basis of the rate of Advance Corporation Tax for the financial year
in which the loan or advance is made (CT6650 onwards).
The non-discrimination Article in an agreement has the
effect that a United Kingdom resident company which is controlled
by non-residents shall not be subject in the United Kingdom to less
favourable taxation treatment than other similar United Kingdom
resident companies.
It has been argued that this provision removes liability
under ICTA88/S419 from a close company which makes a loan or
advance to a non-resident company participator, on the grounds that
there would be no liability if the loan or advance were made to a
United Kingdom resident company.
This is not accepted. First, the non-discrimination
provision in an agreement is based on control of the United Kingdom
company by non-residents, whereas the definition of participator in
Section 417(1) does not depend on the participator having control,
that is, the legislation does not discriminate on the basis of
foreign control. Second, the phrase `other similar enterprises'
requires a comparison between United Kingdom enterprises whose
capital is controlled by residents of the partner to the agreement
in question on the one hand and, on the other hand, United Kingdom
enterprises whose capital is owned by residents of a third state;
since Section 419 applies even-handedly to all foreign controlled
enterprises, it cannot be said to discriminate against United
Kingdom close companies controlled by residents of the particular
agreement partner. Third, Section 419 is a charge on lending
outside the scope of the charge to United Kingdom Corporation Tax.
In this sense too it does not discriminate against close companies
controlled by companies resident in the agreement partner state
since the legislation would also apply if the loan or advance were
made to a United Kingdom individual holding 100 per cent of the
share capital or to a non-resident company participator which was
itself ultimately controlled by United Kingdom residents; again,
the legislation does not discriminate on the grounds of foreign
control.
Finally, the amount payable under Section 419, although tax,
is not Income Tax, Corporation Tax or Capital Gains Tax; nor is it
substantially similar to any of those taxes. It is not, therefore,
one of the taxes covered by an agreement (DT202); nor is relief
from it one of the matters for which an agreement may provide by
virtue of ICTA88/S788 (3).
