INTM581020 - Thin capitalisation: practical guidance -comparison of lending in the UK with other countries: On-lending to the UK by the overseas group

It is not uncommon for an overseas parent of a UK company or group to borrow money in its home territory, often at ultimate parent company level, and pass on a proportion of the funds to its UK subsidiaries. By doing so, it may be able to gain the best terms available, using the strength of its global assets, a credit rating and whatever reputation or track record the group has for honouring its debt obligations.

For example, the US parent of a 100% UK subsidiary group borrows money from a US third party and passes it on, on the same terms, to the UK. The loan from the US to the UK is between connected parties, so the provisions of ICTA88/SCH28AA may be in point.

It may be argued that since the original debt was at arm’s length and the terms of on-lending from the US to the UK identical, the US-UK lending is automatically at arm’s length. This may provide a starting point from which to adjust to an arm’s length price applicable to the UK as stand alone borrower, but it should not be assumed to be correct, since not only are there differences in lending practices between the US and the UK, but the US parent will have a different creditor profile from the UK subsidiary and may be able to borrow more and/or on different terms. Even if the money is borrowed with the specific intention of on-lending for a UK purpose, the third party will still be lending to the US head of the global group, and is likely to feel more secure in doing so than it would in lending to a UK offshoot. Among the questions to be answered are:

• On what terms would the UK borrower have been able to borrow money if it had been independent?
• Would it have done so at all in the circumstances?
• Has the US group allocated an appropriate proportion of the total borrowing to the UK group?

It is legitimate to question whether the UK borrower is adequately capitalised after the loan has been made, and the guidance given in this module is applicable.