Income and Corporation Taxes Act 1988

798Interest on certain overseas loans

(1)This section applies in a case where—

(a)in any chargeable period the profits of any person (“the lender”) which are brought into charge to income tax or corporation tax include an amount computed in accordance with section 795 in respect of interest (“foreign loan interest”) on a loan made to a person resident outside the United Kingdom; and

(b)in determining the liability of the lender to income tax or corporation tax, expenditure related to the earning of the foreign loan interest is deductible in computing the profits referred to in paragraph (a) above; and

(c)the lender is entitled in accordance with this Chapter to credit for foreign tax chargeable on or by reference to the foreign loan interest;

and for the purpose only of determining whether the condition in paragraph (b) above is fulfilled in a case where the lender has in fact incurred no expenditure related to the earning of the foreign loan interest, it shall be assumed that he has incurred such expenditure.

(2)In subsection (1) above “interest”, in relation to a loan, includes any introductory or other fee or charge which is payable in accordance with the terms on which the loan is made or is otherwise payable in connection with the making of the loan; and any reference in this section to foreign loan interest shall be construed accordingly.

(3)If in a case where this section applies the foreign tax referred to in subsection (1)(c) above is or includes an amount of spared tax, then for the purposes of income tax or corporation tax the amount which apart from this subsection would be the amount of the foreign loan interest shall be treated as increased by so much of the spared tax as does not exceed the permitted amount, as defined in subsection (4) below; but nothing in this subsection prejudices the operation of section 795 in relation to foreign tax which is not spared tax.

(4)In this section “spared tax” means foreign tax which although not payable falls to be taken into account for the purposes of credit by virtue of section 788(5); and the permitted amount, in relation to spared tax which is referable to the whole or any part of the foreign loan interest, is an amount which does not exceed—

(a)15 per cent. of the interest to which the spared tax is referable, computed without regard to any increase under subsection (3) above; or

(b)if it is less, the amount of that spared tax for which, in accordance with any arrangements applicable to the case in question, credit falls to be given as mentioned in subsection (1)(c) above.

(5)If in a case where this section applies—

(a)the foreign tax referred to in subsection (1)(c) above is or includes an amount of tax which is not spared tax; and

(b)the amount of tax exceeds—

(i)the amount of the credit which, by virtue of this Chapter (but disregarding subsection (6) below), is allowed for that foreign tax against income tax or corporation tax; or

(ii)if it is less, 15 per cent. of the foreign loan interest, computed without regard to any increase or reduction under this section,

then, for the purposes of income tax or corporation tax, the amount which, apart from this subsection, would be the amount of the foreign loan interest shall be treated as reduced by a sum equal to the excess.

(6)Where this section applies, the amount of the credit for foreign tax referred to in subsection (1)(c) above which, in accordance with this Chapter, is to be allowed against income tax or corporation tax—

(a)shall be limited by treating the amount of the foreign loan interest (as increased or reduced under subsection (3) or (5) above) as reduced (or further reduced) for the purposes of this Chapter by an amount equal to so much of the lender’s financial expenditure in relation to the loan concerned as is properly attributable to the period for which the interest is paid; and

(b)shall not exceed 15 per cent. of the foreign loan interest, computed without regard to paragraph (a) above or to any increase under subsection (3) above or any reduction under subsection (5) above.

(7)For the purposes of this section the lender’s financial expenditure in relation to a loan is the aggregate of—

(a)the financial expenses (consisting of interest or similar sums) incurred by the lender in or in connection with the provision of the loan, so far as those expenses consist of payments which either are charges on income for the purposes of corporation tax or are deductible in computing profits of the lender which are brought into charge to income tax or corporation tax; and

(b)where the loan is financed by the issue of securities at a discount by the lender, so much of the amount of the discount as either constitutes such a charge as is mentioned in paragraph (a) above or is deductible as mentioned in that paragraph; and

(c)so much as it is just and reasonable to attribute to the loan of any interest or other return foregone by a person connected or associated with the lender in connection with the provision of funds to the lender, either interest free or in other circumstances more favourable to the lender than if the parties were at arm’s length; and

(d)any other sum, whether paid by way of refund of tax or interest or by way of commission, which—

(i)is paid by the lender or a person connected or associated with him;

(ii)is paid directly or indirectly to the borrower or a person connected or associated with him;

(iii)is deductible as mentioned in paragraph (a) above;

(iv)would not, apart from this paragraph, be taken into account in determining the amount of the foreign loan interest; and

(v)it is reasonable to regard as referable to the loan or the foreign loan interest (or both).

(8)In a case where the amount of the lender’s financial expenditure in relation to a loan is not readily ascertainable, that amount shall be taken, subject to subsection (9) below, to be such sum as it is just and reasonable to attribute to the financing of the loan, having regard, in particular, to any market rates of interest by reference to which the rate of interest on the loan is determined.

(9)The Board may by regulations supplement subsection (8) above—

(a)by specifying matters to be taken into account in determining such a just and reasonable attribution as is referred to in that subsection; and

(b)by making provision with respect to the determination of market rates of interest for the purposes of that subsection;

and any such regulations may make different provision for different cases.

(10)For the purposes of this section—

(a)section 839 applies; and

(b)subsection (10) of section 783 applies as it applies for the purposes of that section.

(11)Where the loan on which the foreign loan interest is payable was made pursuant to an agreement entered into before 1st April 1987, this section shall have effect subject to the following modifications in relation to interest payable before 1st April 1989—

(a)in subsection (1) in paragraph (a) the words “in a territory” shall be inserted after “resident” and the words following paragraph (c) shall be omitted;

(b)subsection (2) shall be omitted;

(c)in subsection (5) for paragraph (b) there shall be substituted—

“(b)that amount of tax exceeds the amount of the credit which, by virtue of this Chapter and in particular subsection (6) below, is allowed for that foreign tax against income tax or corporation tax;”and

(d)for subsections (6) to (10) there shall be substituted—

“(6)Where this section applies, the amount of the credit for foreign tax referred to in subsection (1)(c) above which, in accordance with this Chapter, is to be allowed against income tax or corporation tax shall not exceed 15 per cent. of the foreign loan interest, computed without regard to any increase under subsection (3) or any reduction under subsection (5) above.”;

but subject to that, this section applies whether the loan was made before or after the passing of this Act.