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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: The Ultimate Debtor Rule-Detailed Application: Loans to partnerships/transparent entities

Some intra-group financing arrangements will involve loans to a partnership or other type of transparent entity. While UK tax rules treat a UK corporate partner in a partnership as the borrower for tax purposes (rather than the partnership), this will not necessarily be the case when looking at an entity with overseas corporate partners. Whether the ultimate debtor for the purposes of TIOPA10/Part 9A/S371IG(1)(a) are the partners or the partnership will depend on how the relevant partnership is treated for tax purposes in its territory of residence i.e. are there similar “look through” rules that treat the entity as “transparent” or in the absence of such rules whether under its governing law, corporate or otherwise, how it is treated i.e. does the partnership have legal personality (and so could be sued)? Where a CFC makes a loan to an entity within a group that is transparent from a local tax perspective and doesn’t have a separate legal personality, the company partners will likely be the ultimate debtors in relation to such a loan, rather than the partnership. This means that a claim under Chapter 9 can still be considered in respect of the loan, but the question of who are the ultimate debtors may be settled by reference to who the partners are.

Establishing the identity of the ultimate borrower is important because under TIOPA10/S371IG(1)(a), one of the conditions for a loan made by a CFC to be a qualifying loan relationship (QLR) (see INTM217000) is that the ultimate debtor is a qualifying company. There is no definition of company within Part 9A (other than to include cells in a cell company as if they are separate companies) and so the general definition at CTA10/S1121 is applicable. Under section 1121, “company” means any body corporate or unincorporated association, but does not include a partnership. Therefore, a partnership is not a company for the purpose of assessing whether a loan is a qualifying loan relationship.

Where a loan is treated as made to the partners that are companies, rather than the partnership, then the loan would be split between the company partners in accordance with the partnership’s profit sharing arrangements or other legal agreements that govern the share of the partnership’s profits, assets and liabilities.