INTM572035 - Thin capitalisation: an overview of thin cap work: Referrals to Business International - issues of interest
The Transfer Pricing Team at Business International is particularly interested in certain aspects of thin cap and associated funding issues. Referrals are generally no longer mandatory, but these issues are regarded as ones where the caseworker would particularly benefit from access to the accumulated experience and knowledge of the financial transfer pricing specialists, and where the specialists should be au fait with the problems being encountered. Of course, Business International will need early warning of cases where litigation is in prospect in relation to these issues or any other international issues within their remit.
Such issues include:
Thinning out - the practice of using a group restructuring to significantly increase the proportion of debt to equity in a UK group whilst the commercial activities remain largely the same. This is classically achieved through the setting up of a new UK parent company which then inserts a high proportion of debt to acquire the “old” UK group, plus perhaps a couple of overseas group companies not already held by the UK. See INTM508010 onwards for more detail. This issue may give rise to FA96/SCH9/PARA13 arguments about the purpose of the borrowing (see below).
Upstream loans - where UK-based companies receive loans from overseas subsidiary companies, rather than receiving dividends, in order to thin out the UK tax base - see INTM508060.
Treaty shopping - broadly, treaty shopping can be regarded as an arrangement put in place to take advantage of a provision in a double taxation agreement (DTA) for tax purposes - see INTM573120, INTM507060, INTM159084, INTM464110.
Beneficial ownership - under most DTA’s, a key condition of a successful claim to treaty relief is that the claimant, the recipient of the income from a UK source, is entitled freely to enjoy the income, and is not in fact acting as a conduit or intermediary, obliged to pass the income on to another entity. - see INTM332010, INTM342550 and the guidance on the implications of the Indofood case at INTM332040 to INTM332080
Private equity - there is a chapter on private equity thin cap work at INTM5800000 which should be consulted before deciding whether to refer to Business International.
Loan relationships for unallowable purposes - CTA09/S441-S442 (formerly FA96/SCH9/PARA13) is an important anti-avoidance provision which disallows deductions for interest, etc, on a just and reasonable apportionment to the extent that the loan from which the deductions arise is for unallowable purpose. This is defined at section 442(1) as one “which is not amongst the business or other commercial purposes of the company”. For more detail see INTM509030-INTM509090. The Anti-Avoidance Group is ultimately responsible for the application of this legislation and may wish to have input into cases.
Borrowing to repay share capital or to pay dividends - this is a complex area where the particular facts and circumstances are crucial and early guidance would be advisable. INTM509060 gives some indications as to the circumstances where such borrowing might be challenged.
Arbitrage
Applications for clearance under the 2005 anti-arbitrage legislation are dealt with by arbitrage specialists within the Transfer Pricing Team at Business International. See INTM597510 for contact names. Applications should be referred to:
There is guidance from INTM597500 onwards on identifying cases, factors to consider, running enquiries, etc. The arbitrage team will deal with arbitrage clearance applications [see INTM596550], issue arbitrage notices where appropriate [see INTM596510] and provide technical and procedural advice in connection with interpretation of the arbitrage legislation and the working of enquiries into the self-assessments of companies to whom the arbitrage legislation may be applicable.
