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HMRC internal manual

International Manual

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 - Detailed Application: Loans made to fund another loan

TIOPA10/Part 9A/S371IG(3) to (6) establish who the ultimate debtor is where a loan is made and used (directly or indirectly) to fund another loan. They provide that the ultimate debtor will be a person (“P”) if: a loan is provided to a UK resident person as part of an arrangement to facilitate a loan on substantially the same terms from that UK resident person to a non UK resident connected person, P. The ultimate debtor rule applies to treat P as the ultimate debtor.

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It is possible that this type of arrangement is being used to avoid another country’s withholding tax. If a CFC in country A were to lend £100m to a group company resident in country B, that company might be required to withhold tax on the interest paid on the loan. However if the double taxation agreements between country A and the UK and country B and the UK provide that interest can be paid gross, then it might be argued by the group that routing the loan via the UK means the withholding tax that would be charged by country B is avoided. This type of arrangement does not affect any claim under Chapter 9, but if it is considered that such an arrangement is in place in order to avoid another country’s withholding tax you should provide details of the arrangements to CSTD Business, Assets & International Base Protection Policy team so consideration can be made as to whether the terms of a DTA or the European Directive relating to the exchange of information require the UK to exchange information with another fiscal authority.

Double Taxation Relief restriction

In other cases where a UK resident company is used as a conduit, the UK resident company may claim double taxation relief in respect of withholding tax deducted from interest paid to the UK conduit company. In these circumstances relief for foreign tax is restricted as the UK is being used a conduit rather than being the primary lender. Guidance on the application of this restriction can be found here.