CFM96290 - Interest restriction: related parties: where unrelated parties hold at least 50% of the same debt

TIOPA10/S468

The related party rules exist to limit the scope for a related party outside the group using loans and other instruments in place of equity to inflate the interest capacity of the group through the group ratio method or the public infrastructure rules.

However, there are situations where debt is held by a related party for commercial reasons and on the same terms as debt issued to third parties. The fact that third parties hold the same class of debt provides assurance that the entity is not borrowing excessively.

The rules therefore provide that debt owed to a related party is not treated as such where at least 50% of the debt is held by unrelated parties. The key test here is that the debt held by the related parties must have been issued at the same time and must confer the same rights as the debt held by the unrelated parties.

Same rights

Creditors are not regarded as having the same rights if:

• The terms on which the money is lent make different provisions in relation to different persons or can have a different effect to different persons.
• Arrangements are in place that mean the rights of some persons in relation to any of the debt differ from the rights of others.
• Circumstances exist such that the rights of some persons cannot reasonably be regarded as being, in substance, the same as rights held by other persons in respect of any of the debt.