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HMRC internal manual

International Manual

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HM Revenue & Customs
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Distribution exemption: Interpretation: certain non-dividend distributions

Recharacterisation as a distribution

CTA10/S1000 includes legislation that re-characterises as a distribution certain interest or other value passing from a company in respect of securities which in reality amounts to the withdrawal of profits from a company. Such distributions may be made, for example, by paying interest at an excessive rate or at a rate dependent on the results of the company’s business.

CTA10/S1000(1) E treats as a distribution any interest or other distribution out of assets of the company in respect of securities where the consideration given by the company in respect of the principal secured represents more than a reasonable commercial return for the use of that principal.

CTA10/S1000(1) F applies to interest and other types of distribution in respect of securities as described in CTM15515.

Distributions that fall within S1000(1) E or F cannot be exempt distributions (see INTM653020).

There is an overlap between S1000(1) F and transfer pricing legislation, since interest paid at more than a commercial rate will frequently represent a non-arm’s length transaction. TIOPA10/S155 requires S1000(1) E to be disregarded when considering whether a tax advantage arises for the purposes of TIOPA10/Part 4.

This has the effect of ensuring that where both TIOPA10/Part 4 and S1000(1) E have the potential to apply, it will be TIOPA10/Part 4 that takes effect. It also enables the recipient of the interest to make a claim under TIOPA10/S174 also to be taxed on the basis of the arm’s length amount.