INTM508050 – Intra-group Funding: 'thinning out'

When to tackle 'thinning out'

If the introduction of debt means that gearing levels or income/profit cover levels cease to be justifiable at arm’s length, the standard thin capitalisation measures will operate in the usual way.

But some of the more substantial ‘thinning out' cases will warrant a review, particularly where:

• restructurings occur that create minimal or no change to the nature of the group’s operations in the UK or elsewhere, assuming there are no other justifiable commercial considerations in play
• there are no third party acquisitions or disposals involved - reorganisations arise principally by virtue of third party disposals and acquisitions – where the Inspector should consider whether any accompanying debt introductions can, in commercial terms, be properly associated with the transactions
• in the case of a UK multinational, when the UK tax base is being thinned out by upstream loans from foreign subsidiaries - the same commercial principles as are mentioned on the previous page should be applied in deciding whether or not a challenge is appropriate.