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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: forex: non-arm’s length transactions: application of TIOPA10/Part 4

Forex and transfer pricing (TIOPA10/Part 4)

Where, after 1 April 2004, a UK company is thinly capitalised, TIOPA10/Part 4 will apply to restrict the interest deduction. In summary, Part 4 applies where:

  • provision has been made between two persons (provision includes the making of a loan, although it goes far wider than this), and
  • one of the affected persons participates directly or indirectly in the management, control or capital of the other, or some third party participates directly or indirectly in the management, control or capital of each;
  • the provision is on non-arm’s length terms, and
  • it confers a potential UK tax advantage on one or both persons.

TIOPA10/Part 4 limits the legislation to ensure it does not go wider than the formulation of the arm’s length principle in Article 9 of the OECD model.

Where a transfer pricing adjustment would disregard all of the profits or losses on a debtor loan relationship, any exchange gains or losses arising on the debt are also wholly disregarded under CTA09/S447.

Where the adjustment disregards a proportion of the profits or losses on the debt, the same proportion of exchange gains and losses are disregarded.

Profits and losses go wider than merely interest, but it does not include exchange gains and losses. CTA09/S447(5) stops the transfer-pricing provisions from applying to exchange gains and losses on loan relationships, thus preventing double counting.

Not every debtor loan relationship that is not on arm’s length terms will come within Part 4. In particular, Part 4 will generally not apply to an interest-free or low interest inward loan, because there is no UK tax advantage. See example 1 at CFM38540.

Pre 1 April 2004

Before 1 April 2004, CTA10/Part 23 will apply in many cases to restrict excessive interest or discount paid by a UK company to an overseas affiliate, although in some pre 1 April 2004 cases CTA10/Part 23 does not apply, but the transfer pricing provisions in TIOPA10/Part 4 are applicable. See CFM38550 and Tax Bulletin 37A for more details.