As explained in
INTM547020, thin capitalisation may be
the result of a series of transactions rather than a
straightforward loan between two companies. The simplest form of
this is where one company provides a guarantee in respect of a loan
to another company which has the effect of increasing the amount
that could be borrowed by that company. This situation commonly
arises where a third party bank makes a loan to a subsidiary on the
strength of a guarantee from the group parent and/or fellow
subsidiaries, although it can arise where the lender is in the same
group as the borrower. Where the result of a guarantee is to
increase the interest deductions to the borrower beyond what they
would be if that company were borrowing as a wholly independent
entity, the provisions of ICTA88/SCH28AA/PARA1B apply to restrict
interest deductions on any interest due on or after 1 April 2004 to
the arm’s length amount.
ICTA88/SCH28AA/PARA1B for the most part replicates the main
thin capitalisation provisions contained in paragraph 1A (
INTM562000). It applies where the
provision of a security is made by way of a series of transactions
and there is a guarantee provided by a connected company.
Where this is the case it is necessary to overlook the effect
of the guarantee from a connected company when deciding how much
the borrower could borrow, including the question as to whether
there would have been a loan at all at arm’s length. If the
effect of the guarantee is to increase the interest deductible in
arriving at the assessable profits or allowable losses of the
borrower, it is necessary to make an adjustment under SCH2AA/PARA1
to restrict the interest deductible by the borrower to the
arm’s length amount.
The term “guarantee” is defined very widely in
paragraph 1A(7) and includes any case where the lender has a
reasonable expectation that he will be paid by, or out of the
assets of, another connected company. This encompasses all forms of
written and unwritten guarantee and charges over assets. It also
encompasses any informal understanding that has the effect of
increasing the borrower’s debt capacity beyond what it would
be as a stand-alone entity separate from its parent group.
The term does not however include:
There is however the possibility of a compensating adjustment for a UK guarantor (see INTM563020).
