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HMRC internal manual

International Manual

HM Revenue & Customs
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DT applications and claims - Types of income: Interest

Interest Rates Linked to Profits

This type of loan is sometimes referred to as “ratchet loans” or”contingent interest loans”.

The rate of interest that is paid on these loans is linked to the paying company’sprofits. Generally, the rate of interest due on the loan increases as business resultsdeteriorate and decreases where business results improve.

Until 21 March 2000 interest that was paid on a loan that contained conditions linking theinterest rate to the business results of the company paying the interest were treated asdistributions of profits (dividends). Relief was not allowed under the terms of theinterest article in a double taxation agreement.

From 21 March 2000 the legislation at ICTA88/S209(2) changed. Subject to ICTA88/S212relief from UK tax paid after that date is now available for relief under the interestarticle of a double taxation agreement (DTA).

Form 4450/1FD contains a question (3.2) for the Inspector of Taxes who deals with theCorporation tax affairs of the UK payer to consider.