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HMRC internal manual

International Manual

DT applications and claims - Types of income: Interest

Privately Arranged loans: Inter-company loans

A UK company will often borrow money from another company outside the UK with which ithas some degree of common shareholding. For instance the UK company may be a subsidiary ofthe overseas company. In the absence of a Direction under the terms of SI1970/488 the UKcompany is obliged to deduct tax from any interest that is paid on such a loan.

It is possible for the two companies to agree between themselves that interest will bepaid at non-commercial rates of interest. It is also possible that the UK company might be”thinly capitalised” or for some element of the UK legislation that deals with”transfer pricing” to be offended against. The interest article in doubletaxation agreements contains anti-abuse provisions (normally para 5 “specialrelationship”) that are intended to deny treaty benefits.

It is also possible that the UK company that wishes to borrow the money will approach anoverseas (non-UK) commercial lender in preference to using a UK bank or other institution.In these cases the UK company may apply to include the loan within the terms of the”One to One” element of the Provisional Treaty Relief Scheme (PTRS) for Interest(see INTM338500). If the UK company does not choose to makean application to include the loan in the PTRS scheme and in the absence of a directionissued under the terms of SI1970/488 it is obliged by ICTA88/S349(2) to deduct tax fromany interest that is paid.

Before relief from UK tax can be considered, it is necessary for a report on form 4450/1FDto be obtained from the Inspector of Taxes who is responsible for the Corporation taxaffairs of the UK company