INTM544060 - Thin capitalisation: interest as a distribution - ICTA88/S209(2)(da) (repealed)

Definition of UK borrowing unit with examples:ICTA88/S209(2)(8A)

S209(2)(8A) has been repealed with effect from 1 April 2004 as explained at INTM560000 but continues to apply up to and including 31 March 2004.

The maximum extent of the UK borrowing unit for the purposes of ICTA88/S209(2)(da) is defined at S209(2)(8A). The unit consists of the top UK holding company and all its effective 51% subsidiaries wherever they reside in the world. It follows that there is no requirement for the subsidiaries to be resident in the UK, as is illustrated by the following example:

In this example the borrowing unit to be taken into account when applying ICTA88/S209(2)(da) on the loan from the US parent to A Ltd would consist of B Ltd, A Ltd and the French and Dutch subsidiaries of B Ltd.

It follows that when considering whether A Ltd could have borrowed the loan at arm’s length from B Ltd an Inspector will need to obtain consolidated accounts for B Ltd and its subsidiaries. If consolidated accounts have not been produced, the Inspector should require that consolidated figures to be prepared, pointing out that the legislation requires him to consider the consolidated position. However there is no obligation on the group to produce consolidated accounts as such, and properly drawn up schedules reflecting the consolidated position will be acceptable.

Consider the following example:

This sort of situation, where a number of subsidiaries are held directly by the parent, is quite common where the parent company is based in the Far East, typically in Japan or Korea. Here, the borrowing unit for the purposes of S209(2)(da) would be A Ltd only and would not include B Ltd even though that company is resident in the UK. It follows that no account can be taken of the assets and income of B Ltd when evaluating the borrowing capacity of A Ltd.

The next example involves a dual resident company:

Under the provisions of ICTA88/S209(2)(8D) and S209(8F) the dual resident company cannot be part of the borrowing unit for the purposes of assessing borrowing capacity under S209(2)(da), so the borrowing unit consists of A Ltd only.

Inspectors should note that under the new legislation applicable with effect from 1 April 2004 the concept of a UK borrowing unit is not retained. For further details see INTM560000 et seq.