»Ê¹ÚÌåÓýapp

Example 5 Part 2 - dividends

Facts: »Ê¹ÚÌåÓýapp UK sub-group is funded largely by equity representing retained profits. »Ê¹ÚÌåÓýapp combined effect of the loan and dividend is to replace a proportion of the UK equity by debt, and the scheme creates no new funds for investment. »Ê¹ÚÌåÓýapp dividend represents several yearsâ€� worth of profits and so is exceptional by reference to the UK sub-group’s usual policy. »Ê¹ÚÌåÓýapp profits are retained in the parent company and for the most part are not paid on to the group’s ultimate shareholders. »Ê¹ÚÌåÓýapp loan has a 10 year repayment term.

Analysis: Different fact patterns will lead to different conclusions in such cases, but the above facts suggest either that the scheme did not have a main purpose to deal with a short term cashflow difficulty, or that this purpose did not extend to the whole of the finance provided by the scheme. »Ê¹ÚÌåÓýapprefore it appears that a main purpose of the scheme was to increase UK tax deductions for interest. »Ê¹ÚÌåÓýapprefore Condition C would be met in such a case and Rule A would deny the interest deductions because of the existence of the double deduction.

It is a question of fact and circumstance whether the whole of the loan relates to the scheme’s UK tax advantage purpose. It may be possible to identify part of the loan that does not relate to this purpose, but which serves the same sort of function as the loan described in the first part of this example. If so, the company could disclaim interest deductions that arise from the part of the loan that corresponds to the tax purpose of the scheme, but not those that arise from the commercial purpose, in order to prevent further disallowance under Rule A.