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HMRC internal manual

International Manual

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HM Revenue & Customs
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Transfer pricing: the main thin capitalisation legislation: The acting together rules

Position for accounting periods starting on or after 4 March 2005

TIOPA10/S161 and TIOPA10/S162 (previously ICTA88/SCH28AA/PARA4A) apply the transfer pricing rules where persons have “acted together” in relation to the financing arrangements of a company or partnership. It is included as a type of “indirect participation” in TIOPA10, though in practice it continues to be described as acting together, and it relates to circumstances where there is a community of interests without the participation conditions of TIOPA10/S148 having been satisfied.

“Acting together” has a very wide meaning and it is not necessary for a loan provider to have an equity interest in the borrower for it to be within the scope of the legislation. However, where the loan is from a lender who is otherwise unconnected with the equity investors, in normal circumstances the risk that the terms are other than arm’s length is likely to be low.

INTM519040 explains in more detail how to apply the acting together rules to buyouts and private equity financing.

Transitional rules for pre-4 March 2005 financing arrangements (grandfathering)

Where the financing arrangements in question were made before 4 March 2005, the relevant date for the application of PARA4A (as it then was) will depend on whether there has been a variation in the terms of the debtor relationship. Where the financing arrangements in question were made before 4 March 2005 and remained unchanged until 1 April 2007, the new rules do not apply until 1 April 2007.

Where the financing arrangements in question were made before 4 March 2005 and the arrangements were varied before 1 April 2007 then the new rules apply from the date of the variation.

Where an accounting period straddles the relevant date, the legislation applies to the part of that accounting period beginning with the relevant date, treating it as if a new accounting period began on the relevant date.

Position for accounting periods starting before 4 March 2005

For earlier accounting periods, loans only fall within the transfer pricing rules where the criteria set out at the start of this chapter apply - they are between persons, and one participates in the management, control or capital of the other, or another person participates in the management, control or capital of each of them - see INTM412020.

For these purposes, a person includes a body of persons such as a partnership. So, for instance, where a partnership controls a company - as may often be the position in a private equity case - any loan from the partnership to the company is within the rules, even if none of the partners individually has a controlling interest. But where, for instance, the company is controlled by three partnerships, each of which has less than a 40% interest in the company then the rules will not apply since the control test - as extended to joint ventures - is not met (INTM412050).