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HMRC internal manual

General Insurance Manual

Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: treatment of interest

Article 7 of the OECD Model, explained by paragraphs 18 and 19 of the Commentary, makes it clear that, in general, an establishment cannot pay ‘interest’ to its own head office. This is because

  • from a legal standpoint, the transfer of capital against payment of interest and undertaking later to repay is a formal act incompatible with a hypothesised establishment
  • economically, internal debt and receivables are difficult to justify if in fact the entire enterprise is equity funded and so has no basis for interest charges.Although in principle a formula based on apportionment of debt charges might be justified on the argument above, it was found difficult to apply in practice and the current Commentary precludes deductions for internal debt and receivables except in the case of a financial business, where payment of interest is of central importance. This rule is reflected at ICTA88/SCHA1/PARA5. The definition of financial business is at sub-paragraph 5(3): essentially banking, deposit taking and futures dealing.

OECD Model Article 11 deals with interest paid by a person resident in one State to a resident of another, and Article 7(7) makes Article 7, the Business Profits Article, subject to other Articles. However, GIM10235 explains that Article 7 nevertheless applies where the debt claim in respect of which the interest is paid is effectively connected with a business carried on in the permanent establishment.

Some individual treaties, for example UK/Australia, may contain different rules that lead to the same conclusion.