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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Loans to participators

ICTA88/S419 (1) and 6 provide that, where a close company makes a loan or advance to a company which is not resident in the United Kingdom which is a participator, or an associate of a participator, in the close company, the close company is chargeable to tax on the basis of the rate of Advance Corporation Tax for the financial year in which the loan or advance is made (CT6650 onwards).

The non-discrimination Article in an agreement has the effect that a United Kingdom resident company which is controlled by non-residents shall not be subject in the United Kingdom to less favourable taxation treatment than other similar United Kingdom resident companies.

It has been argued that this provision removes liability under ICTA88/S419 from a close company which makes a loan or advance to a non-resident company participator, on the grounds that there would be no liability if the loan or advance were made to a United Kingdom resident company.

This is not accepted. First, the non-discrimination provision in an agreement is based on control of the United Kingdom company by non-residents, whereas the definition of participator in Section 417(1) does not depend on the participator having control, that is, the legislation does not discriminate on the basis of foreign control. Second, the phrase `other similar enterprises’ requires a comparison between United Kingdom enterprises whose capital is controlled by residents of the partner to the agreement in question on the one hand and, on the other hand, United Kingdom enterprises whose capital is owned by residents of a third state; since Section 419 applies even-handedly to all foreign controlled enterprises, it cannot be said to discriminate against United Kingdom close companies controlled by residents of the particular agreement partner. Third, Section 419 is a charge on lending outside the scope of the charge to United Kingdom Corporation Tax. In this sense too it does not discriminate against close companies controlled by companies resident in the agreement partner state since the legislation would also apply if the loan or advance were made to a United Kingdom individual holding 100 per cent of the share capital or to a non-resident company participator which was itself ultimately controlled by United Kingdom residents; again, the legislation does not discriminate on the grounds of foreign control.

Finally, the amount payable under Section 419, although tax, is not Income Tax, Corporation Tax or Capital Gains Tax; nor is it substantially similar to any of those taxes. It is not, therefore, one of the taxes covered by an agreement (DT202); nor is relief from it one of the matters for which an agreement may provide by virtue of ICTA88/S788 (3).