Other tax rules on corporate finance: deduction of tax: derivatives
Banks do not need to deduct tax from payments that they make under the terms of swaps, futures, options and similar derivatives. Such payments, even where they arise on interest rate derivatives, are not interest. Neither will they, in general, be annual payments, since the counterparty to the derivative will normally have obligations as well as rights under the contract, payments made by the bank will not be pure income profit in the counterparty’s hands.
The point is put beyond doubt for derivative contracts within CTA09/PT7. CTA09/S570 specifically provides that there is no requirement to deduct tax from payments.
Banks may on occasion pay true interest in connection with dealings in derivatives. For example, they may pay interest on margin accounts or on cash held as collateral, or they may be obliged to pay interest if they are late in making a payment due under the contract. CTA09/S570 does not extend to interest paid on money debts of this kind. The normal rules on deduction of tax need to be considered.