CFM35920 - Loan relationships: connected parties: late interest: major interest

CTA09/S377

This section was repealed by FA15. It no longer applies to loans entered into on or after 3 December 2014. For loans entered into before this date the existing treatment continues until 31 December 2015 (or until the debt is modified). For more details, please see CFM35985.

Connection through a major interest

For periods prior to its repeal, there is a connection under S377 where the lender is a company and either

  • the lender has a major interest in the borrower, or
  • the borrower has a major interest in the lender.

The major interest test is designed to ensure that the legislation covers situations where

  • the parties may be able to manipulate mismatches between the taxation of interest paid and received, but
  • one party alone does not control the other party.

This is particularly relevant for joint venture arrangements where, say, two otherwise unconnected companies A and B have 50% interests in a company, C. Neither A nor B alone control C, however A and B could together influence when interest is paid.

The legislation applies only where there is potential for both parties to influence the transactions by looking only at situations where

  • each party has a 40% or more interest in its own right, and
  • both have either debtor or creditor relationships with the company concerned.

(For accounting periods beginning on or after 17 March 2004, there is no longer a requirement for both parties with a major interest in a company to have debtor or creditor relationships with the company for connection to be established.)

Meaning of major interest

CTA09/S473 defines ‘major interest’.

A company (A) has a major interest in another company (B) where

  • A and another person taken together control B, and
  • A and the other person each have at least a 40% interest in B (excluding shares held on trading account), and
  • A and the other person (or companies connected with them) are both debtors or creditors in a loan relationship with B. This last requirement has been removed with effect for accounting periods beginning on or after 17 March 2004.

When looking at control, and whether a company has a 40%+ interest, you include the interests, rights and powers of any company connected with it.

There is an example at CFM35930.