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Example 5 Part 1 - dividends

A foreign group makes a loan to its UK subgroup, which is routed through a hybrid entity in a way that leads to tax deductions for interest on the loan being given both in the UK and also in another jurisdiction. »Ê¹ÚÌåÓýapp purpose of the loan is to enable the UK holding company to pay a dividend to its parent in the foreign jurisdiction. This example considers only the arbitrage legislation, and not, for example, the possible application of ICTA88/S703.

Part 1

Facts: »Ê¹ÚÌåÓýapp dividend relates to the profit arising in the group below the UK parent company and is paid in accordance with the usual policy of the group. »Ê¹ÚÌåÓýapp loan is necessary because the cashflow has fallen temporarily behind the profit arising. »Ê¹ÚÌåÓýapp loan is repayable over a period of three years, which accords with predictions of when the cash will become available.

Analysis: Condition A is met because the use of the hybrid entity represents a qualifying scheme. »Ê¹ÚÌåÓýapp existence of UK tax deductions for interest means that Conditions B and D are met.

Returning earned profits to a parent company is a non-tax purpose for the scheme that includes the loan, which is independent of the use of a hybrid entity. »Ê¹ÚÌåÓýappre does not appear to be a main purpose of obtaining a UK tax advantage and so Condition C is not met. »Ê¹ÚÌåÓýapp arbitrage legislation therefore does not apply.