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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Interest

There is sometimes some difficulty in deciding whether interest is treated as having a United Kingdom source where the borrowing is made by a United Kingdom branch. The source of the interest is relevant because only United Kingdom source interest is within the charge to tax under Case III of Schedule D, and, in accordance with Section 349, Income Tax is deductible from payments of Case III interest with specific exceptions, including some interest on advances from banks in the United Kingdom and certain interest paid by those banks (including non-resident banks trading through branches in the United Kingdom). Interest within Section 349 may qualify as a charge under Section 338(4)(a) (see also DT1951).

The leading case on this subject is a Privy Council decision on a Hong Kong estate duty matter (Kwok Chi Leung Karl (1988) STC728). The Privy Council decided that where a debtor company has two places of residence where a debt may be enforced, the locality of the debt (and its source for tax purposes in the absence of statutory provision to the contrary) falls to be determined by reference to the place of residence where under the contract creating the debt the primary obligation is expressed to be performed (that is where the creditor would apply first for his money). Savings and Investment Division can advise on the situs of debts.