Commentary

D1.791 Loan relationships—Disguised interest

Corporate tax
Corporate tax | Commentary

D1.791 Loan relationships—Disguised interest

Corporate tax | Commentary

D1.791 Loan relationships—Disguised interest

The disguised interest legislation is set out at CTA 2009, ss 486A–486E (Pt 6, Ch 2A). Its aimis to ensure that the return on a transaction which is designed to produce an interest-like return and which has a tax avoidance purpose (see below) is taxed under the loan relationships legislation.

The legislation applies, subject to a number of exclusions (see below) where:

  1.  

    •     a company is a party to an arrangement which produces a return for the company on any amount which is economically equivalent to interest (see below)1 or

  2.  

    •     two or more persons are party to an arrangement which produces a return which is economically equivalent to interest for the persons taken together but not for either of them individually. Where a company is a party to such arrangements its share of the return, determined on a just and reasonable basis, is treated as a profit arising from a loan relationship2

An arrangement for these purposes is defined as including any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), other than one which constitutes a finance lease within the meaning of CAA 2001, s 2193.

Note it is possible for a company that is not a party to an arrangement for a tax avoidance purpose to elect that the disguised interest legislation apply to the return4. Such an election must be made no later than the time at which the arrangement begins to produce a return for the company and is irrevocable5.

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