Controlled Foreign Companies: The CFC charge gateway chapter 9 - exemptions for profits from qualifying loan relationships: what is a qualifying loan relationship: the ultimate debtor rule - overview
The ultimate debtor rule was introduced in part to ensure that loans that would otherwise qualify for the finance company exemptions within TIOPA10/Part 9A/Chapter 9 are not prohibited from so qualifying because they are routed through one or more companies for commercial reasons. The rule “looks through” intermediate steps to establish where money is actually being lent. Those steps might be a straightforward conduit with a loan being made using back to back to arrangements with another person, or might involve a more complex arrangement using an equity investment in a conduit company which makes an equity investment in a second conduit which in turn makes a loan to the ultimate debtor.
Money is deposited with a third party bank by a CFC as part of an arrangement by which the banks makes a loan to a connected person, P. The loan was routed via the third party bank because of local restrictions on intra group borrowing. A loan from the CFC direct to P would qualify for the exemptions within Chapter 9. In this scenario the ultimate debtor rule applies to treat P as the ultimate debtor rather than the bank so that the Chapter 9 exemptions are available to the CFC.
The ultimate debtor rule also operates to prevent any planning to circumvent other rules within Chapter 9 (mainly the qualifying loan relationship rules), again to ensure a claim under Chapter 9 is considered by reference to the actual borrower
A loan is provided from a CFC to another overseas group company (that is able to claim the tax exemption under Chapter 14) , which puts the money on deposit with a bank, or makes an upstream loan to a UK resident group company. The terms of the loan more or less match those of the deposit with the bank or the upstream loan. In either case, the bank or the UK resident group company is treated as the ultimate debtor.
The ultimate debtor rule is not intended to impose a tracing requirement on each and every loan within the group. It is however in part intended to prevent the qualifying company rules being exploited and where this appears to be a risk, groups should be expected to provide evidence sufficient to establish the identity of the ultimate debtor. And while the ultimate debtor rule is also intended to provide groups with the opportunity of conduiting loans, groups wishing to take advantage of the rule will need to be able to provide evidence sufficient to establish the identity of the ultimate debtor.