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International Manual

HM Revenue & Customs
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Arbitrage: practical guidance - examples demonstrating the application of the arbitrage legislation: Example 2 Part 3 - outward investment

Example 2 Part 3 - outward investment

Facts: For this part of the example we assume that the scheme was set up in order to replace a loan that had previously been provided for an existing overseas subsidiary. The scheme did not result in any new funds being made available to the foreign subsidiary. The foreign subsidiary already incurred an interest deduction because of the previous loan to a UK group company.


As above, Conditions A, B and D are met.

Condition C: We can draw the following conclusions from the above facts:

  • the scheme lacks a commercial purpose, because it does not make new funds available to the foreign subsidiary; and
  • it did not have the purpose of creating a foreign tax deduction, because the same deduction already existed.

It is therefore hard to avoid the conclusion that under these facts, the scheme is intended to create a deduction to match and therefore cancel the interest receipt arising in the UK under the previous arrangement.

Therefore the scheme does have a main purpose to achieve a UK tax advantage. As all the conditions are satisfied, it is necessary to consider the deductions rules. In this example, Rule A will apply because the deduction available to the UK subsidiaries is also available to the partnership under the Code A. All of the subsidiaries’ deductions will be disallowed.

Finally it is necessary to consider whether a disclaimer is possible. There is no commercial purpose for any part of the loan, and the above conclusions apply to the whole of it. A disclaimer would have to be for all the deduction to cancel the effect of the main purpose.