INTM215330 - Controlled Foreign Companies: before CTSA

Apportionment: payment of interest treated as distribution

When chargeable profits are computed, the meaning of distribution in ICTA88/S209 and the provisions of ICTA88/S210, ICTA88/S211 and ICTA88/S254 apply. The result is that payments of interest to a non-resident company can be treated as a distribution under ICTA/S209 (2)(e)(iv)and (v).

ICTA88/SCH24/Para1 (1) deems a controlled foreign company to be resident in the United Kingdom for the purposes of Chapter IV. That does not mean, however, that it is a resident of the United Kingdom for the purposes of a double taxation treaty. There may be a treaty with the country in which the recipient of the interest is resident. The terms of the Interest Article in such a treaty may override ICTA/S209 (2)(e)(iv)and (v). If that happens, the controlled foreign company is in a worse position than a company resident in the United Kingdom.

Such cases should be dealt with on their merits to avoid a double charge. In particular, take the case where the Board makes a direction. It apportions an amount to persons controlling the controlled foreign company. The Inspector may allow interest treated as a distribution as a reduction to this amount. This follows from the enactment of FA94/S134.

The Inspector may apportion to the loan creditor chargeable profits equal to the interest paid. The Inspector can also do this where a controlled foreign company pursues an acceptable distribution policy. The Inspector can therefore reduce net chargeable profits by the interest paid. However, the interest payment may be part of an arrangement to avoid the application of ICTA/S209 (2)(e)(iv)or(v) on a UK company. In such a case the Inspector should not apportion the interest to the recipient but to the UK controlling company. And the Inspector should exclude the interest from the chargeable profits of the recipient to avoid a double charge. This would arise where, for example, the Inspector would treat interest paid by the controlled foreign company as a distribution. That is if it were paid directly by a United Kingdom associate.