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INTM574010 - Thin capitalisation: treaty clearances: The procedure for recommending treaty clearance

Only the DT Treaty Team at LBS Nottingham, formerly part of Charity Assets & Residence (CAR), can issue give treaty clearance for the payment of interest to an overseas resident without the deduction of income tax or subject to deduction at a lower “treaty rate”. The following administrative changes do not affect that, or change the withholding tax obligations associated with the process.

CAR acted on claims lodged with them up to and including 21st March 2007 on the recommendation of the caseworker responsible for the corporation tax affairs of the UK borrower, which sometimes meant delays while the caseworker dealt with any thin capitalisation problems.

For applications received by them after 21st March 2007, the Treaty Team may make enquiries into the bona fides of the treaty claim, but it will not refer to the CT office, except perhaps for assistance with the treaty issues. Should there be any thin capitalisation concerns, these will be dealt with by the CT office or a transfer-pricing specialist, either when the borrower applies for an Advance Thin Capitalisation Agreement or through an HM Revenue & Customs enquiry.

It is still possible for the overseas lender to make an application under the “old”, pre-ATCA process, with thin cap concerns forming part of the clearance process, though it is difficult to find reasons why they should want to.

There is no way for a company to obtain certainty about thin cap for future periods except by negotiating an ATCA, (or, under the old “treaty route” process, getting a conditional clearance covering thin cap issues). If the company chooses this latter option, the DT Treaty Team will contact the CT office asking for a clearance recommendation. The CT office (with some degree of involvement from a specialist) will either make the enquiries necessary for them to resolve any thin cap issues, or make an immediate recommendation because there is no problem. If anything other than a routine recommendation is required, LBS Nottingham should be kept informed of progress and at the conclusion sent a copy of the thin cap agreement in accordance with which the treaty clearance is to be issued.

The “treaty route” described above is likely to be used only rarely if at all, because this approach became optional (on an opt-in basis) in relation to applications received by HMRC after 21st March 2007 and is not obviously attractive. Guidance on its processes has therefore been abbreviated. The Transfer Pricing Team at Business International can provide further detail if needed.