B4.150 Transfer pricing on loans

Business tax
Business tax | Commentary

B4.150 Transfer pricing on loans

Business tax | Commentary

B4.150 Transfer pricing on loans

In all cases when determining whether a loan is on arm's length basis HMRC will look at how much, if any, of the loan would have been made had the companies been independent, and review the rate of interest and loan terms to those independent parties would have agreed1.

HMRC provide detailed guidance on transfer pricing and loans in INTM413000 and INTM510000 and this summarised below. The OECD Transfer Pricing Guidance on Financial Transactions was issued in February 2020 and was developed as part of Actions 4 and 8-10 of the BEPS Action Plan, this guidance is summarised in B4.150A.2. .

Thin capitalisation

Adjustments to the principal of a loan arise from contentions by HMRC3 and other tax authorities that this level of funding could not have been obtained at arm's length ('thin capitalisation'). A thin capitalisation review applies the arm's length principle to company borrowing and lending, taking into account all the terms and conditions and other factors affecting the borrowing, including the amount of debt, the interest rate, repayment terms, etc. If it is considered that at arm's length there is excess debt, the interest paid on the excess debt is disallowed for tax purposes in the UK4.

This has two implications:


    •     there is a corporation tax charge on the disallowed interest, which may result in double taxation as it constitutes income already subjected to tax in the jurisdiction of the lender, and


    •     the tax adjustment could be subject to

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