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INTM574020 - Thin capitalisation: treaty clearances: The conditions for immediate treaty clearance recommendation

For clearance applications lodged with the DT Treaty Team at LBS Nottingham (formerly with Charity, Assets & Residence) after 21st March 2007, only treaty issues are explored. Thin cap enquiries are deferred until either an application for an Advance Thin Cap Agreement is received, or the issue is taken up as a post-return enquiry.

Provisional treaty relief scheme

There is guidance on this scheme, starting at INTM338500.

There are two circumstances in which HM Revenue & Customs may give a provisional authority for a company to make payments of interest gross or at a reduced rate of withholding tax to an overseas lender. These are circumstances where the DT Treaty Team considers the risk of treaty relief not being due is low:

  • one company to one company loans where there is no shareholding relationship or degree of common ownership;
  • loans from syndicated lenders.

Although the LBS treaty team would normally deal with the interest payer directly in these cases, the office dealing with the corporation tax return of the payer should be kept informed, and should be prepared to facilitate communication if necessary.

Since September 1999 it has been possible to obtain provisional authority for interest to be paid to the overseas lender at the rate allowed by the double taxation treaty (nil or a reduced rate). Details first appeared in the Taxes Series memo TS67/99, published on 29 June 1999, and in the June 1999 Tax Bulletin (TB41C, page 668) and see INTM338510.

  • a booklet is available entitled 'Provisional Treaty Relief Guidelines', which can be downloaded from the HMRC website at: http://www.hmrc.gov.uk/cnr/ptr_guide.pdf

One-to-one company loans

A prerequisite of participation in the provisional relief scheme is that there must be no shareholding relationship or other element of common ownership between the lender and the borrower. This is a simpler condition than the special relationship condition outlined in the tax treaty. If there is no ownership relationship between the borrower and the lender, then the borrower may contact the DT Treaty Team to discover if it has formally considered a clearance application from the overseas lender within the previous three years, which has resulted in relief at source or a successful claim to repayment. If that is the case, the DT Treaty Team will send form PTRPAY1 to the borrower to make an application for inclusion in the scheme. If the application is in order, they will then send PTRPAY2 to the borrower authorising it to make payments incorporating treaty relief immediately.

If the team does not receive an application for treaty relief in the normal way from the lender within three months of the date of provisional authority, it will withdraw the authority. It will then look to the UK company to collect the tax that it should have deducted from the interest payments, together with any interest on the unpaid tax under TMA70/S87.

If it emerges that treaty relief is not due, either wholly or in part, the authority will be withdrawn. HMRC will then look again to the UK company to account for the tax and any interest under TMA70/S87.

Syndicated loans

A syndicated loan has more than one lender participating, with a lead bank as “arranger” and with a syndicate manager to administer the loan on behalf of the lenders. Because of the multiple lenders, the treaty relief is dealt with by reference to the loan itself and the syndicate manager rather than individual lenders.

The syndicate manager may apply for provisional relief on form PTRSM1, summarising the main details of the loan and undertaking to submit a composite treaty clearance application on behalf of all the syndicate members within three months. If the application is in order, the DT Treaty Team will issue provisional authority to give treaty relief when making interest payments. The syndicate manager will pass a copy to the UK borrower, which may act on it if they wish.

The syndicate manager must send the formal application to the DT Treaty Team within three months of the provisional clearance. It does not need to go through the overseas tax authority in this case, since HMRC will liaise with that authority if necessary. The extent of contact with the CT office of the borrower will depend on which side of 21st April 2007 the application fell.

The DT Treaty Team will arrange with the syndicate manager to keep the authority under review, and will keep the borrower’s corporation tax office informed of material changes. If there are any changes in the composition of the syndicate, the syndicate manager is expected to notify LBS Nottingham, but such a change will not invalidate the treaty clearance given for the loan.

For both single and syndicated loans where provisional treaty clearance is given, caseworkers need to be alert to situations where gross interest payments might have been made in periods not covered by a clearance. If that occurs, then assessments under ICTA88/SCH16 may be required, with the interest falling due under TMA70/S87. See INTM574060.