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HMRC internal manual

Corporate Finance Manual

Debt cap: income from EEA group companies: interaction with double taxation agreements

Primacy of double taxation arrangements

TIOPA10/S302(5) and S303(5) state that when determining whether or not the payer has qualifying EEA tax relief available, conditions A and B are not met where relief is denied either by the actions of Schedule 15 itself, or where the denial of relief stems from a provision arising from a Double Taxation Arrangement between any two territories.

Subparagraph (5)(b) in both sections 302 and 303 emphasises that provisions that result from double taxation arrangements include provisions sanctioned by the associated enterprise rules contained in such arrangements.

For the purposes of TIOPA10/PT7/CH5, Double Taxation Arrangements means arrangements between any two territories for granting relief from double taxation. The ‘associated enterprise rules’ are defined as rules that were contained in Article 9 of the OECD Model Tax Convention or any other rules that have the same equivalent terms to Article 9.

These qualifications to conditions A and B preserve the primacy of the Double Taxation Arrangements in areas of cross-border taxation.

Example 1

This example deals with the provisions of a double taxation agreement on the attribution of profits to permanent establishments.

PE Bravo is a permanent establishment tax resident in an EEA territory of non-EEA Company Bravo. PE Bravo pays interest amounts to Company Charlie which is resident in the UK.

The provisions of the double taxation arrangements between the EEA territory and the territory, in which the non-EEA Company Bravo is resident, mean that the interest paid by PE Bravo is more correctly attributed to Company Bravo in the non-EEA territory.

Without excluding the effects of the double taxation arrangements, a situation such as the above would give rise to PE Bravo not obtaining a deduction for the payment it makes to Company Charlie. This could result in Company Charlie being exempted from bringing the financing income amount into account for Corporation Tax purposes.

This would create an anomaly, whereby the amount is attributable to a company in a non-EEA territory, so outside the scope of Chapter 5, but because the payer is tax resident in an EEA territory, and no relief is available for the payment, the financing income amount could be exempted from being brought into account for corporation tax purposes.

The exclusion of disallowances or limits on relief created by double taxation arrangements prevents such anomalies occurring.

Example 2

This example deals with a situation where the ‘associated enterprises’ rules have applied to a loan.

The UK and another EEA territory have a Double Taxation Agreement in force. Under Article 9 of that Agreement there are rules that determine that the level of interest that should be charged between associated enterprises is what would have been charged at arms length between unconnected parties.

Company Ab, tax resident in an EEA territory, has been denied relief on part of the interest that it pays to Company Ba, tax resident in the UK, because the interest and loan principle exceeded what would have been charged or loaned at arms length under Article 9 of the Double Taxation Agreement between the two countries.

For the purposes of TIOPA10/PT7/CH5 Company Ab would be regarded as having qualifying EEA tax relief available to it in respect of all of the interest, including the part disallowed, therefore condition A would not be met, since the effect of double taxation agreements are disregarded.

So, Company Ba would not be able to exempt, under the debt cap rules, the interest income received from Company Ab. If a UK company believes that there has been double taxation because of a disallowance imposed on an EEA associated enterprise by the UK’s treaty partner, it can apply to the UK competent authority for a corresponding adjustment under the mutual agreement procedure. TIOPA10/PT7/CH5 is not intended as an alternative to, or substitute for, this procedure.