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CFM96220 | Interest restriction: related parties: general rule

From HM Revenue & Customs · Corporate Finance Manual

The general rule is that A and B are related parties on a particular day where any one of three conditions is satisfied:

1. The consolidation condition

A and B meet this condition if:

  • Their financial results for a period are required to be comprised in group accounts.

  • Their financial results for the period would be required to be comprised in group accounts, but for the application of an exemption.

  • Their financial results for a period are actually comprised in group accounts.

Group accounts means accounts prepared under section 399 of the Companies Act 2006, or any corresponding provision of the law of a territory outside the United Kingdom.

2. The participation condition

A and B meet this condition if, within the period of six months beginning or ending with that day, either of the below are met:

  • Either A or B directly or indirectly participates in the management, control or capital of the other; or

  • The same person or persons directly or indirectly participates in the management, control or capital of both A and B.

Whether a company participates in the management, control or capital of the other is determined in a similar way as for transfer pricing. But unlike for transfer pricing, TIOPA10/S161 and S162 do not apply when determining the participation condition for CIR purposes.

Where either A or B is a securitisation company, they are not treated as related parties if this treatment only arises by virtue of the securitisation company being held by a trustee of a settlement with the other party being a settlor of that settlement.

Example

A Ltd has one wholly owned subsidiary (B Ltd) which it disposes of to an unrelated party on 1 April 2017. The participation condition is met up to this date because A Ltd directly controls B Ltd. A Ltd and B Ltd will continue to be related parties up until 1 October 2017, because this is six months from the day the condition was last met.

3. The 25% investment condition

A and B meet this condition on any day where either A or B has a 25% investment in the other or a third person has a 25% investment in both A and B.