INTM502020 – Intra-group funding: downstream loans - practical issues

Information gathering

This section deals with the basic facts relating to a straightforward downstream loan case. If the argument is raised that the loan is performing an equity function, more information will be needed. This subject is dealt with at INTM503000 onwards.

The Inspector should seek to establish the facts of the case, obtaining the following:

• a copy of the accounts of the borrower. This should not be a problem if the subsidiary of the UK company is overseas, because the documents will be in the control of the UK company. If the borrower is an overseas company not owned directly or indirectly by the UK company, and the UK company is unwilling or unable to obtain the accounts, it may still be possible to obtain them using the Exchange of Information provisions (See INTM156000). Accounts may also be available on the Internet or from one of a number of commercially available databases - see INTM467180 and INTM467130 for more information on the use of such sources.
• a copy of the loan agreement, if one exists, together with any minutes of meetings, notes or correspondence which shed light on the circumstances of the making of the loan
• background to the loan - duration and usage. Was it lent and applied for any specific purpose? Were there previous loans and what happened to them? Were they written off or repaid? Have the terms of the agreement been applied as rigorously as they would have been if the parties had been at arm's length?
• details of by how much and for how long the company has been in receipt of a loan derived from leaving trading debts unsettled.
• in cases where it is suspected that favourable trading terms to affiliates have created a de facto loan out of extended credit, it is vital to obtain details of normal third party credit terms, what the customary procedures are for reluctant or defaulting debtors. If the UK company does not have third party debtors of a comparable scale or type, because it deals largely with affiliate companies, try to find out what is the customary practice for the type of business in which the UK company is engaged. The suggestions at INTM461230 - Risk assessment: review of information from other sources - may be helpful.