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Inward loan: does TIOPA10/Part 4 apply?

Example 1

Quodlines is a UK company which is wholly owned by a German company Quodlines GmbH. »Ê¹ÚÌåÓýapp UK company is funded with £1 share capital and a â‚�1m interest-free loan. Sch 28AA does not apply because Quodlines Ltd is not obtaining any UK tax advantage. »Ê¹ÚÌåÓýapprefore, exchange gains on the loan are fully taxed, and exchange losses fully relieved.

Example 2

Praslone Ltd is a UK subsidiary of a US company, Praslone Inc. »Ê¹ÚÌåÓýapp parent company makes a loan of $5 million to Praslone Ltd; the UK company pays interest of $300,000 on the loan. In the same period, an exchange gain of £250,000 arises on the loan. Praslone Ltd has already agreed with its tax inspector that the loan, in part, fulfils an equity function and that two-fifths of the interest would not have been paid in the absence of the parent/subsidiary relationship.

Although the UK company has borrowed $5 million from the US parent, it is agreed that an arm’s length, it would only have been able to borrow $3 million. Accordingly, only 60% of the interest paid by the UK company on the loan is allowed, the remainder being disallowed under TIOPA10/Part 4.

Under CTA09/S447, a similar restriction is made to exchange gains and losses on the loan. Thus, if the accounts show an exchange gain of £250,000 in the period, only £150,000 (60% x £250,000) is taxable.

Example 3

As above except the parent company makes two loans, a loan of $5m and one of â‚�5m. »Ê¹ÚÌåÓýapp company pays 6% on both loans. In the same period an exchange gain of £250,000 arises on the dollar loan and an exchange loss £150,000 arises on the euro loan. As above it is agreed that two-fifths of the interest is re-characterised as a distribution. »Ê¹ÚÌåÓýapp same proportion - two-fifths - of the exchange gain on the dollar loan and exchange loss on the euro loan is disregarded. »Ê¹ÚÌåÓýapprefore, in its tax computation the company will recognise a credit of £60,000 (net gain of £100,000 - (40% x £100,000)).