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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: returns from partnerships: avoidance schemes: examples

Example of schemes to avoid CT on interest

This guidance applies to companies that have interests in partnerships up to 21 April 2009

The following two examples show in outline how companies can structure arrangements involving partnerships to generate an interest-like return which for tax purposes does not arise as interest.

Scheme 1 - Discounted capital contribution

The scheme facilitator incurs an obligation to make a capital contribution to a limited partnership at a future, specified, date. Consequently, the value of its partnership interest at the future date is already known. It then sells its partnership interest to the avoiding company for an amount which is equal to the discounted value of the capital contribution that it remains obliged to make.

When the capital contribution is paid, the avoiding company will hold an interest in the partnership whose value is equal to the amount it paid plus an interest-like element. The avoiding company therefore claims that the interest-like return is tax-free.

Scheme 2 - Enhanced capital entitlement

The avoiding company pays a capital contribution to a partnership of which it is a member. The company initially receives less of the partnership profits than is warranted by reference to its contribution, but there is a compensating increase in its entitlement to the partnership capital. The two amounts combine to give an interest-like return to the avoiding company that it claims is tax free.