Cross-border financing

By Tolley in association with Robert Langston of Saffery Champness

The following Corporation Tax guidance note by Tolley in association with Robert Langston of Saffery Champness provides comprehensive and up to date tax information covering:

Cross-border financing
Introduction
Factors affecting the deductibility of interest in the UK
Corporate interest restriction
Worldwide debt cap

Introduction

This guidance note outlines the tax considerations when a foreign company makes a loan to a UK company.

An overseas company may make a loan to a UK company in a number of circumstances, including:

•when an acquisition is made in the UK
•to fund expansion or working capital of the UK company

Although this guidance note outlines the UK tax considerations of loans, similar considerations may apply when loans are made to companies in other countries.

It should also be noted that UK withholding tax may arise on interest which is paid by a UK company to a company in another country.

See the Withholding tax and Withholding tax on payments of interest guidance notes.

Factors affecting the deductibility of interest in the UK

Transfer pricing and thin capitalisation

Loans between connected companies will be subject to the transfer pricing rules (see the Overview of transfer pricing principles guidance note). Two persons are connected if one of them participates directly or indirectly in the management, control or capital of the other, or if each of them is subject to direct or indirect participation in the management, control or capital by the same person or persons. The definition of control is extended where loans are involved, and a lender will be attributed the rights of all other parties acting together in relation to the finance arrangements.

TIOPA 2010, ss 161, 148

Interest and other financing costs are not deductible to the extent that the interest or loan exceeds an arm’s length amount. When determining this arm’s length amount, the transfer pricing rules require consideration of: