Section 131 | Interpreting provision about interest influenced by special relationship

(1)Subsections (3) and (6) apply if double taxation arrangements—

(a)make provision, whether for relief or otherwise, in relation to interest (as defined in the arrangements), and

(b)contain a special relationship rule.

(2)A “special relationship rule” is provision that—

(a)applies if the amount of the interest paid is, because of a special relationship, greater than the amount (“the ordinary amount”) that would have been paid in the absence of the relationship, and

(b)has the effect that the provision mentioned in subsection (1)(a) is to apply only to the ordinary amount.

(3)The special relationship rule is to be read as requiring account to be taken of all factors, including—

(a)the question whether the loan would have been made at all in the absence of the special relationship,

(b)the amount which the loan would have been in the absence of the special relationship, and

(c)the rate of interest, and the other terms, which would have been agreed in the absence of the special relationship.

(4)Subsection (3) does not apply if the special relationship rule expressly requires regard to be had to the debt on which interest is paid in determining the excess interest (and accordingly expressly limits the factors to be taken into account).

(5)If—

(a)a company (“L”) makes a loan to another company with which it has a special relationship, and

(b)it is not part of L's business to make loans generally,

the fact that it is not part of L's business to make loans generally is to be disregarded in applying subsection (3).

(6)The special relationship rule is to be read as requiring the taxpayer—

(a)to show that there is no special relationship, or

(b)if there is a special relationship, to show the amount of interest that would have been paid in the absence of the relationship.