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HMRC internal manual

International Manual

HM Revenue & Customs
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Arbitrage: practical guidance - examples demonstrating the application of the arbitrage legislation: Example 5 Part 1 - dividends

Example 5 Part 1 - dividends

A foreign group makes a loan to its UK subgroup, which is routed through a hybrid entity in a way that leads to tax deductions for interest on the loan being given both in the UK and also in another jurisdiction. The purpose of the loan is to enable the UK holding company to pay a dividend to its parent in the foreign jurisdiction. This example considers only the arbitrage legislation, and not, for example, the possible application of ICTA88/S703.

Part 1

Facts: The dividend relates to the profit arising in the group below the UK parent company and is paid in accordance with the usual policy of the group. The loan is necessary because the cashflow has fallen temporarily behind the profit arising. The loan is repayable over a period of three years, which accords with predictions of when the cash will become available.

Analysis: Condition A is met because the use of the hybrid entity represents a qualifying scheme. The existence of UK tax deductions for interest means that Conditions B and D are met.

Returning earned profits to a parent company is a non-tax purpose for the scheme that includes the loan, which is independent of the use of a hybrid entity. There does not appear to be a main purpose of obtaining a UK tax advantage and so Condition C is not met. The arbitrage legislation therefore does not apply.