Corporation Tax

Introduction to cross-border financing

Produced by Tolley
  • 05 Apr 2022 08:43

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Introduction to cross-border financing
  • Introduction
  • Factors affecting the deductibility of interest in the UK
  • Transfer pricing and thin capitalisation
  • Interest reclassified as a distribution
  • Unallowable purposes
  • Hybrid and other mismatches
  • Loans to a UK branch
  • Corporate interest restriction

Introduction to cross-border financing

Introduction

This guidance note outlines the UK tax considerations that arise 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:

  1. when an acquisition is made by a subsidiary in the UK

  2. to fund expansion or working capital of the UK company

One of the key tax considerations arising in the context of cross-border financing is the extent to which interest payable by the UK company to the overseas company will be deductible. There are various elements of the UK tax regime that may restrict the deductibility of interest, such as transfer pricing, the corporate interest restriction and targeted anti-avoidance provisions. These are outlined below.

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, whereas payments of interest between UK companies is not subject to withholding tax.

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

Transfer pricing is the price at which an enterprise transfers either physical goods, intangible property or services, including financing arrangements, to associated enterprises, as explained in the Transfer pricing rules ― overview guidance note. Two persons are associated 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

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