The UK HMRC on October 18 published supplementary guidance on anti-avoidance rules that exclude some creditor loan relationships from being considered “qualifying loan relationships” for purposes of the controlled foreign companies (CFC) finance company exemption.
The guidance notes that the OECD/G20 base erosion profit shifting project and potential changes in US tax laws, such as laws targeting the use of hybrid entities, may cause tower structures to become ineffective from a group level tax perspective.
As a result, some businesses may seek to unwind existing tower structures and invest the same capital in the equity of a CFC finance company, so that the CFC can lend to a US subgroup to preserve a US tax deduction but eliminate the possibility that profits from the loan become taxable in the UK.
HMRC advises, though, that in this situation, Section 371IH(9A) to (9E) will switch off the finance company exemption for the CFC’s loan to the US subgroup to ensure that the profits from the loan are subject to UK tax.
The UK said that a main purpose of the replacement will typically involve, as an essential element, a reduction in UK loan relationship credits. The purpose test of section 371IH(9A)(c)(i) is therefore not met, and section 71IH(9B) will deny partial or full exemption.
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