INTM507030
– Intra-group funding: group finance companies and the
treasury function
Location decisions
In deciding where to locate a finance company groups will take
into account both commercial factors and tax factors, and then make
an overall assessment of the benefits to be obtained from
centralising treasury functions in any given location. The UK is a
favoured location because of its market access and many plc’s
will have located their treasury companies within the UK.
Commercial factors
Tax factors
Likely locations
Non-resident group finance companies
UK group finance companies
More complex tax benefits
In terms of commercial factors, a group will need to
consider
- how conducive any location is to the
activities themselves, including access to markets (trading floors,
etc), availability of staff, feasibility of relocating staff to the
new location, communication links (both with group personnel and
third party providers of finance), local regulation and funding
regimes
- the costs that would be involved in the
move
- co-location savings
- the nature of the proposed activities
(treasury management strategy and/or execution of transactions) in
any given jurisdiction
- ease of monitoring and managing group
risks
- the scope/scale
(national/pan-European/international/global) of the proposed
activities in any given jurisdiction.
The tax considerations will include consideration of-
- the applicable corporate tax rate (or
rates)
- domestic withholding tax provisions
applicable to financial payments out of the jurisdiction
- the country’s treaty network and in
particular whether or not the prospective payments and receipts of
interest will be treaty-protected and made and received gross
- any specific tax rules for financial
activities, including the basis on which the group finance
company’s profits will be computed for the purposes of local
corporate taxes or, indeed, the availability of special rates for
certain types of finance companies (as in the Netherlands, for
example). Claims that a company is taxable within a jurisdiction
will not necessarily mean that the company is taxable in full in
respect of the interest income.
Tax havens are unlikely locations for group finance activities
which merely involve 'plain vanilla' flows of yearly interest. This
is because, in respect of the company’s interest receipts,
there are likely to be withholding taxes in the source countries.
But several non-haven jurisdictions are attractive because of
specific features of their tax systems-
- Ireland is used because of its tax rates (and the
regime for International Financial Service Companies)
- The Netherlands is an attractive location on
account of its treaty network and its special regime (and rates)
for finance companies
- Belgium can appeal because of the specific tax
rules for companies functioning as co- ordination centres, but has
withholding taxes.
- Switzerland and Luxembourg are beneficial
locations on account of their liberal taxation treatment of finance
branches.
Where a UK multinational locates its finance subsidiary abroad,
the Inspector will want to
- satisfy himself that it is genuinely resident
outside the UK
- ensure that transactions with UK group companies
are on arm’s length terms - for instance the 'turn' taken by
the overseas company on transactions on behalf of UK companies
should not exceed a reasonable commercial rate, and a UK parent
should be recompensed for providing any loan guarantees
- consider the possible application of the
Controlled Foreign Companies ('CFC') legislation (see
INTM201000)
For guidance on risk assessing a group finance company in the UK
see
INTM507050.
Whether a group finance company is located in the UK or abroad,
more complex tax benefits can arise:-
- where interest deductions can be 'double dipped'
(typically through the use of hybrid entities) or
- by structural arbitrages (involving the use of
hybrid instruments and/or financial products designed to minimise
or avoid global tax liabilities).
For more information on tax arbitrage see
INTM509130 onwards.
