INTM489605 | Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: section 80 exceptions – excepted loan relationship outcome

An effective tax mismatch outcome is an excepted loan relationship outcome if it arises wholly from either:

• anything that would produce debits or credits under Part 5 of CTA 2009 if a party to it was within the charge to corporation tax, or

• a loan relationship and a derivative contract entered into entirely as a hedge of risk in connection with the loan relationship.

The existence of a loan relationship, or loan relationships, within the material provision that gives rise to an effective tax mismatch outcome does not of course automatically mean that the outcome is excepted. It must arise wholly from the loan relationship(s) and/or hedging contract.

Example: Excepted loan relationship rule

Company A is a UK resident company that has a group financing subsidiary resident in a low tax territory. The group financing company is a Controlled Foreign Company within the finance company partial exemption rules.

Company Z (a non-UK resident company in the same group as Company A) requires debt funding for the purposes of its trade. For the last two years Company A has provided this funding through a long-term loan, but now arranges to terminate the loan early and injects equity into the group financing company which then on lends the funds to Company Z.

Provision has been made or imposed as between Company A and the group finance company, which is effectively given the opportunity to lend its capital to Company Z. There is an effective tax mismatch outcome on the basis that there is a reduction in A’s taxable income giving a reduction in the amount of corporation tax payable that we assume here exceeds the resulting increase in relevant taxes payable by the group finance company. However, this tax mismatch outcome arises wholly from a matter (that is, the intragroup loan) that is within the excepted loan relationship rule. Hence, the excepted loan relationship outcome rule means that this arrangement is not within scope of DPT.