Commentary

D1.731A Loan relationships—Risk transfer schemes

Corporate tax
Corporate tax | Commentary

D1.731A Loan relationships—Risk transfer schemes

Corporate tax | Commentary

D1.731A Loan relationships—Risk transfer schemes

The Taxes Acts contain anti-avoidance measures to counter so called over hedging arrangements or risk transfer schemes using loan relationships or derivative contracts1. These were arrangements used by groups to hedge exchange exposure arising on shares and other assets, where the hedge was normally entered into by a company (borrower) other than the company that owned the shares or other asset (asset holding company). Such arrangements were sometimes used where it was not possible for the asset owning company to enter into the debtor loan relationship itself (where the asset holding company was a party to the debtor relationship the exchange movements would normally be treated as matched under the measures that are discussed in D1.732). In other cases groups used such techniques in order to try to make a profit (typically this applied where a cross currency swap was involved as the company received a higher periodic net payment as a result of the interest differential between the two currencies covered by the swap contract, whilst knowing that the group was insulated from risk of loss on an after tax basis (assuming that the group had sufficient tax capacity to relieve exchange losses arising on the swap)).

In such cases where a loan was used as a hedge the borrower would enter into a debtor relationship that was denominated in the same or an economically equivalent currency to that in which the asset was denominated. The amount of the debtor relationship would be grossed up

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