INTM503020 – Intra-group funding: downstream loans - dealing with ‘equity function’ arguments

Preparatory work to an equity function case

Risk assessment

As indicated in INTM503010, an important consideration in the risk assessment of an equity function case is that, once the contention has been accepted, the ‘loan’ in question continues to be treated as equity thereafter. There is therefore only one chance to enquire into the matter, although this enquiry need not take place at the inception of the ‘loan’.

It is impossible for an Inspector to take up every potential issue that arises in the examination of a return. An Inspector will therefore want to undertake a risk assessment in relation to the equity function issue, and would not pursue the matter where the amount of tax at stake is small or the resource requirement does not warrant starting or continuing an enquiry, unless there is an important principle or precedent at stake. (See INTM461200 onwards. for more detailed advice on risk assessment).

Examination of the treaty

As indicated in INTM503010, it is important in cases where the loan is made to an overseas subsidiary to examine the double taxation agreement carefully.

Obtaining the important facts and information

An Inspector should ensure that all the information relevant to a decision is available, such as

• a copy of the accounts of the borrower. This should not be a problem when the borrower is an overseas subsidiary of the UK company, because the documents will be in the control of the UK company. If the borrower is overseas and is not owned directly or indirectly by the UK company, it may still be possible to obtain accounts using the Exchange of Information provisions (see INTM156000 for guidance on when and how to make such a request)
• a copy of the loan agreement for the transaction(s) you are looking at, and perhaps any minutes/notes surrounding the agreement
• correspondence relating to any attempts by the borrower to obtain loans locally
• the attitude of the tax administration in an overseas borrower’s country to the loan, particularly if it were interest-bearing
• the history of the loan: is it the first? Have the amounts been increased over time? Have any previous loans been written off?
• the attitude of an overseas borrower’s country to inward investment.

Some of this information may already be available, but some may only come to hand after an enquiry has been opened (see INTM503030 – Working an equity function case).