Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
, see all updates

Arbitrage: practical guidance: case identification and working of enquiries: profiling for arbitrage cases

It is not always easy to identify a company to which the arbitrage legislation might apply. Where a deductions scheme involving a hybrid entity is involved, it is not immediately obvious how the overseas recipient of a payment might be treated for tax purposes in its country of residence. Similarly, it is not always apparent in the case of certain financial instruments whether the receipt overseas will be taxed, treated as non-taxable, or regarded as a capital receipt.

Where it is known what type of overseas entity is the recipient of a payment, it may be helpful to consult the entity classification list prepared by CTIAA, Business International to see whether HMRC views them as transparent or opaque (see INTM180030).

The following are some pointers in assisting with identifying a company to which the arbitrage legislation might apply. Look out for these features:

  • Usually a large debt relationship (although the arbitrage legislation can apply to deductions other than interest deductions)
  • Involvement of companies resident in states where a consolidation regime (such as the US check-the-box system, see below) applies
  • Involvement of foreign partnerships (with UK partners) which are treated as opaque (that is, as a separate entity) in their country of residence rather than as a transparent entity (the UK view, taxing the partners on their share of profits or gains)
  • New holding companies following group reorganisations
  • Deferred share consideration schemes
  • Finance branches
  • Long term debt.

A significant aspect, for arbitrage purposes, of the US check-the-box system is that a subsidiary of a US company can elect to be treated for US tax purposes as if it has been liquidated and its assets and liabilities have become those of its immediate parent, with the effect that it is treated as a branch of its immediate parent. Any loans between the company and its immediate parent are thus disregarded for US tax purposes, so that neither the deduction nor receipt will be taxed by the US. At the same time, the company remains a separate entity for UK tax purposes.

There are other aspects of the US check-the-box system that may create a hybrid effect.

If Officers have any specific queries about the operation of these rules, the first port of call for further information is the International Issues Manager:

  • LBS IIMs 
  • Local Compliance IIMs.

who may seek further advice from the arbitrage team in CTIAA, Business International (see INTM597510).