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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: alternative finance: other tax rules: treatment of non-residents

Alternative finance arrangements and non-residents

Although the form of an alternative finance arrangement may be for example the buying and selling of an asset, a non-resident who is the ‘creditor’ under an alternative finance arrangement is in substance making an investment in the same way as a non-resident who is placing money on deposit in the UK. It would therefore be inappropriate for the non-resident to be treated as carrying on a trade in the UK.

It is important to note that although the return on these types of financial arrangement is treated as interest for UK tax purposes it may not be interest for the purpose of double taxation agreements nor for the Interest and Royalties Directive. Nevertheless where there is a requirement to withhold tax on an alternative finance payment that is paid to a non-resident, the non-resident is entitled to claim the benefits of any double taxation agreement between the UK and their country of residence. That agreement will define the relevant taxing rights of the treaty partner states.

If a non-resident company makes an investment into the UK using any alternative finance arrangement defined in CTA09/PT6/CH6, this does not by itself, mean that that the non-resident company has a permanent establishment in the UK for the purposes of CTA10/S1144. This exception includes anything done for the purpose of the arrangement or by any person acting for the non-resident company in relation to the arrangements, for example the buying and selling of commodities for a purchase and resale arrangement.

Similarly the categories of persons in ITA07/S835J not to be treated as UK representatives for income tax and capital gains tax for the purposes of ITA07/PT14/CH2B and TCGA92/PT7A/CH1 has been expanded to include the other party to an arrangement within the tax rules on alternative finance arrangements, or any other person acting for the non-resident in relation to the arrangement.