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HMRC internal manual

Savings and Investment Manual

Deduction of tax: yearly interest: UK source: companies

Interest paid by companies

In deciding whether or not interest has a UK source, in addition to the factors described in SAIM9090, there are other matters to be taken into account for companies.

Companies and branches

Where the debtor is a company it may of course have more than one residence - for example it may be registered in a US state but managed and controlled from the UK. Jurisdiction in relation to a corporation will in general depend on where the corporation does business (except where the EU Regulation or the 1968 Convention apply - see SAIM9090). So for these purposes it will be resident where it carries on business. If a debtor company has a number of places of residence/business then to decide the location of the debt you have to look at the terms of the loan agreement. The loan agreement should say where the interest and loan are payable, which (if the company is also resident in that place) will determine whether or not the interest has a UK source.

When it comes to considering loans made to a branch of a UK company the source of the interest is overseas if all the following factors apply:

  • an overseas branch of a UK resident company has entered into a loan agreement overseas;
  • the loan is for the business of the overseas branch;
  • the overseas branch pays the interest from its income;
  • the loan agreement obligations are enforceable in the jurisdiction in which the branch is situated.

Conversely, where a branch of a non-UK resident company enters into a loan agreement in the UK for the business of its UK branch and the UK branch pays the interest then the interest is regarded as having a UK source.

Companies within the EU

Under both the EU Regulation and 1968 Convention, domicile is the main ground of jurisdiction and will, at first sight, determine the rules for the recoverability of debts. EU regulation 44/2001 provides for a definition of domicile for corporations so that the company is domiciled where it has its statutory seat (in the UK its registered office), central administration or its principal place of business. However it is important to note that a corporation is not domiciled in a country for these purposes merely because it does business there. If an EU based company carries on business in a country in which it is not domiciled you have to consider the terms of the loan agreement to determine the situation of the debt. For example, if a company which has its principal place of business in the UK also carries on business in another Member state, where the interest and loan are payable in that other Member state and that member state’s courts have jurisdiction then the interest will be non-UK source.

For branches of EU companies the position is as described above for branches generally.