Loan relationships: connected parties: late interest: major interest
Connection through a major interest
There is a connection under CTA09/S377 where the lender is a company and either
- the lender has a major interest in the borrower, or
- the borrower has a major interest in the lender.
The major interest test is designed to ensure that the legislation covers situations where
- the parties may be able to manipulate mismatches between the taxation of interest paid and received, but
- one party alone does not control the other party.
This is particularly relevant for joint venture arrangements where, say, two otherwise unconnected companies A and B have 50% interests in a company, C. Neither A nor B alone control C, however A and B could together influence when interest is paid.
The legislation applies only where there is potential for both parties to influence the transactions by looking only at situations where
- each party has a 40% or more interest in its own right, and
- both have either debtor or creditor relationships with the company concerned.
(For accounting periods beginning on or after 17 March 2004, there is no longer a requirement for both parties with a major interest in a company to have debtor or creditor relationships with the company for connection to be established.)
Meaning of major interest
CTA09/S473 defines ‘major interest’.
A company (A) has a major interest in another company (B) where
- A and another person taken together control B, and
- A and the other person each have at least a 40% interest in B (excluding shares held on trading account), and
- A and the other person (or companies connected with them) are both debtors or creditors in a loan relationship with B. This last requirement has been removed with effect for accounting periods beginning on or after 17 March 2004.
When looking at control, and whether a company has a 40%+ interest, you include the interests, rights and powers of any company connected with it.
There is an example at CFM35930.