CFM96330 - Interest restriction: related parties: loans made by relevant public bodies

TIOPA10/S471

Some companies are wholly owned by relevant public bodies, meaning the public body is a related party of its subsidiary. Likewise there can be occasions where a public body has a significant stake in a company. Often such a company is significantly constrained in who it is permitted to borrow from. In such cases the loans made by the public body would, except for s471, fall into the related party provisions.

There is a specific rule which operates to disapply the related party provisions in these sorts of situations.

Where a relevant public body (B) lends money to a related party (P), B and P are not treated as related parties in respect of the loan, provided that the realising of a profit is only incidental to the making of the loan.

Example: Public body providing a loan to a subsidiary which is carrying out the objectives of the public body.

A local authority has a subsidiary which provides rental accommodation to people within the local authority area (social housing). The local authority charges an arms-length commercial margin to its subsidiary on the interest on a loan it makes to its subsidiary.

Whether or not the profit on the loan is incidental to the making of the loan depends on the facts. In this case the local authority is a relevant public body as defined in TIOPA10/s491. The local authority does make a profit on the provision of the loan. However the main purpose of the local authority is to provide social housing for people within the local authority area. This is done through the subsidiary company. In these circumstances the profit on the loan is likely to be incidental to the making of the loan and therefore the related party provisions would not apply.

In other circumstances there can come a point where the profit making would constitute a purpose in its own right. This is likely to be the case, for example, where the public body is a public pension fund or sovereign wealth fund with a key objective of generating returns on funds invested.