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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: income from EEA group companies: qualifying EEA tax relief available for future period of account

Conditions for qualifying EEA tax relief to be unavailable in a future period

The exemption for a financing income amount is also dependent, again in part, on whether or not the EEA tax resident payer is able to obtain relief for the payment in any future period.

TIOPA10/S304 sets out the two conditions that must be met before it can be said that no qualifying EEA relief is available in any future period.

Condition A is that no deduction calculated by reference to the payment can be taken into account in calculating any profits, income or gains that:

  • might arise to the payer in any period after the current period, and
  • would, if they did so arise, be chargeable to any tax of the UK or an EEA territory for any period after the current period.

There is no requirement for the payment to retain its character into the future period. For example, if the EEA resident company pays interest in a particular period, and the payment increases the amount of a trading loss which is capable of being offset against future trading profits, condition A will not be met. Similarly, suppose interest is added to the cost of a fixed capital asset: under the law of the EEA territory concerned, the interest will be taken into account as part of the base cost when computing a profit or gain on disposal of the asset. Here again, condition A will not be met.

Condition B is that no relief determined by reference to the payment can be given in any period after the current period for the purposes of any tax of the UK or an EEA territory by:

  • the payment of a credit,
  • the elimination or reduction of a tax liability, or
  • any other means of any kind.

So, if the payer or any other person can obtain relief by the payment of a credit, the elimination or reduction of a tax liability or by any other method in a future period condition B is not met.

Example

Company A, which is tax resident in an EEA territory, pays interest to company B, which is tax resident in the UK, on a loan made by company B. Both are members of the worldwide group.

Under generally accepted accounting practice, company A shows the accrued interest as an expense in its accounts and Company B shows the accrued interest as a receipt in its accounts.

For tax purposes the receipt of the financing income amount accrued by company B is income to be brought into account for the purposes of corporation tax. However, in the EEA territory in which company A is tax resident no deduction is allowed for accrued interest between connected parties until such times as the interest is actually paid.

While company A cannot obtain an immediate deduction for the purposes of EEA tax, it may do in some future period if the accrued interest is paid to company B.

Therefore, condition A would not be met, and company B would not be able to exempt the financing income amount for the purposes of corporation tax.

For the purposes of conditions A and B, it is not relevant whether, as in this instance, the interest is ever paid. Rather, the important point is that in some future period there could be a deduction for company A.

TIOPA10/S303(5)

As with TIOPA10/S302, if the only reason that conditions A and B are met (that is, the payer cannot obtain a deduction or relief for the payment) is because

  • TIOPA10/PT7 itself has applied to disallow the deduction or limit the relief, or
  • the application of a double taxation arrangement disallows the deduction or limits the relief,

then Conditions A and B have not been met, tax relief would have been available to the payer, and so the financing income has to be brought into account for corporation tax purposes by the recipient.