Income and Corporation Taxes Act 1988

340Charges on income: interest payable to non-residents

(1)A payment of interest by a company is one to which section 338(4)(c) applies if the company is carrying on a trade and—

(a)under the terms of the contract under which the interest is payable, the interest is to be paid, or may be required to be paid, outside the United Kingdom; and

(b)the interest is in fact paid outside the United Kingdom; and

(c)either—

(i)the liability to pay the interest was incurred wholly or mainly for the purposes of activities of the company’s trade carried on outside the United Kingdom; or

(ii)the interest is payable in a currency other than sterling and, subject to subsection (2) below, the liability to pay the interest was incurred wholly or mainly for the purposes of activities of that trade, wherever carried on.

(2)Subsection (1)(c)(ii) above does not apply where—

(a)the trade is carried on by a body of persons over whom the person entitled to the interest has control; or

(b)the person entitled to the interest is a body of persons over whom the person carrying on the trade has control; or

(c)the person carrying on the trade and the person entitled to the interest are both bodies of persons, and some other person has control over both of them.

In this subsection references to a body of persons include references to a partnership and “control” has the meaning given by section 840.

(3)For the purposes of subsection (1) above the company paying the interest shall be treated as carrying on any trade carried on by a 75 per cent. subsidiary of it (both being bodies corporate) if the subsidiary (as well as the company making the payment) is resident in the United Kingdom.

(4)In determining for the purposes of this section whether one company is a 75 per cent. subsidiary of another that other company shall be treated as not being the owner—

(a)of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade; or

(b)of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt; or

(c)of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.