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HMRC internal manual

International Manual

HM Revenue & Customs
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EU Interest and Royalties Directive: Handling enquiries into claims on interest payments

HMRC has three months from receipt of a complete and certified claim under the Directive to reach a decision as to whether to accept or refuse the claim. This period starts once the information specified at SI2004/2622 has been received by the Large Business Service Double Tax Treaty team. This information does not include material necessary for establishing the arm’s length amount of interest. Officers in receipt of applications for exemption will need to consider thin capitalisation issues once they become aware that an application for exemption has been made. In cases where thin capitalisation is suspected, Officers should seek further information from the UK borrower as soon as an application for exemption is received.

Thin capitalisation issues

A great deal of guidance is provided in the Thin Capitalisation modules of this Manual. Practical guidance on working cases starts at INTM511000.

Before launching any thin capitalisation enquiries Inspectors should establish the relationship between the claimant and the payer in order to decide whether TIOPA10/Part 4 (previously ICTA88/SCH28AA) potentially applies. This is because the Directive requires only a 25% interest while TIOPA10/Part 4 requires control (see INTM432060) so not all Directive cases can be subject to transfer pricing/thin capitalisation rules.

An exemption notice cannot be refused or delayed on the grounds that the arm’s length amount has not been ascertained or that the UK payer may be thinly capitalised. However, it is desirable that HMRC should raise the question of considering this issue before the three month time limit expires. The exemption applies only to the arm’s length amount, so there is an opportunity at this point to determine the arm’s length amount and for the claimant and the payer to obtain certainty on this point.

Exemption notices and Schedule 28AA

The legislation at ITTOIA05/S763 clearly states that the exemption applies only to “so much of the payment as does not exceed the arm’s length amount” (S763 (2)). Therefore, if enquiries aimed at establishing the arm’s length amount have not been concluded at the expiry of the three month time limit, it should be made clear to the UK payer that the issue of the notice does not constitute an acceptance by HMRC that the relevant interest is the arm’s length amount. The Large Business Service Double Tax Treaty team should be asked to issue the notice while making it clear that the giving of an exemption notice under the Directive only applies to the arm’s length amount and does not preclude the application of TIOPA10/Part 4 (previously ICTA88/SCH28AA) to restrict the interest deductible to the UK borrower. A letter should be written to the company on the same basis, advising them of the position and of the steps which they need to take to obtain certainty on the arm’s length amount. This will usually be in the form of further information required which will vary from case to case but will usually include accounts, projections, and details regarding interest rates.

The Special Relationship regulation of SI2004/2622 says that a notice may specify:

  • the amount of a payment
  • the method to be used for determining the amount of the payment

It is considered that the method includes such method as would be specified in a thin capitalisation agreement, even if at the time of issue of the notice, the contents of the thin capitalisation agreement have not yet been agreed.

Where there are grounds for invoking ITTOIA05/S765, the anti-avoidance provision, the LBS Double Tax Treaty team should be told that the exemption notice should be refused. However, anyone considering issuing such a refusal should approach Business International, Financial Transfer Pricing Team beforehand. See INTM400110.