CFM97335 - Interest restriction: public infrastructure: loans advanced through non-resident intermediaries

TIOPA10/S438A

Where a company qualifies as a qualifying infrastructure company (QIC), certain tax-interest expense amounts are taken out of the CIR rules and so cannot be disallowed (see CFM97300 for further information).

This applies where the loan creditor is either not a related party or is themselves a QIC. This allows a QIC to utilise the public infrastructure rules where it borrows directly from a third party. It also allows the public infrastructure rules to operate in respect of indirect finance through a series of UK companies within the group where each company is also a QIC. This, in effect, creates a ring-fence and ensures that the financing is directly linked to the UK infrastructure assets.  

F(2)A23 extends the rules through the addition of S438A which provides for cases where finance is made through intermediate companies which are not based in the UK.

Intermediate non-UK companies

The extension to the public infrastructure rules can apply to a company (“C”) which is:

  • a member of the same worldwide group as a QIC but is not a UK group member, and
  • a creditor in relation to an amount which is a relevant loan relationship debit for the debtor company (or would be if the debtor company was UK resident).

In relation to that loan relationship debit, C will be treated as if it were a QIC provided that:

  • C meets the public infrastructure income test (CFM97200) and the public infrastructure assets test (CFM97210) throughout the accounting period,
  • the loan in question (the “relevant loan”) is fully funded by another loan (the “corresponding loan”) which was made to C for that purpose and on substantially the same terms as the relevant loan, and
  • amounts arising to C in respect of the corresponding loan would qualify as “exempt amounts” if TIOPA10/S438(2) were to be applied.   

In determining whether C meets the public infrastructure income test and assets test, the standard types of income and assets are extended to also include:

  • shares in, or debt issued by, a company that meets the income or asset test (as appropriate); or
  • shares in, or debt issued by, a company that is treated as meeting the income or assets test (as appropriate) under this extended rule.

The relevant loan will be fully funded by the corresponding loans if there is a clear link between the two loans. This should be apparent when the loans are entered into. For example, where there is an obvious cash flow which shows the corresponding loan funding the relevant loan. If this corresponding loan is subsequently refinanced, the clear link should typically continue unless there is evidence to the contrary.

All rights and obligations conferred by each loan must be compared when determining whether the loans are made on substantially the same terms. This includes areas such as principal amount, interest rate, lending term, payment dates, special clauses, etc. The legislation does allow for very small differences, for example, where the interest rate on the relevant loan incorporates an arm’s length margin. Where the corresponding loan is refinanced, resulting to a change to some of its terms, the relevant loan will continue to meet the ‘substantially the same terms’ test provided it is also amended to mirror the corresponding loan’s new terms.    

In determining whether the amounts arising to C on the corresponding loan would qualify as exempt amounts, the standard types of income and assets to which the creditor can have recourse to is extended to include shares in, and debt issued by, companies whose assets comprise only such income and assets (including indirectly through other such companies).

Any source of income or any asset is ignored if it is reasonable to regard it as insignificant when determining whether the recourse condition is met. (See CFM97200 or CFM97210 for further guidance on what constitutes insignificant).    

Example

Alpha LLC is a US-resident company which borrows £2m from a third party and on-lends £2m on the same terms to Beta LLC, another US-resident company. Beta LLC then lends £2m, again on the same terms, to QIC Ltd which is a UK-resident company and qualifies as a QIC. Alpha LLC, Beta LLC and QIC Ltd all belong to the same worldwide group.  

Interest of £80,000 arises on the loan between QIC Ltd and Beta LLC in the first year and this will be a relevant tax-interest expense amount for QIC Ltd.

Alpha LLC owns Beta LLC, and has no assets other than the loan to Beta LLC and the shares in Beta LLC. Beta LLC owns QIC Ltd and has no assets other than the loan to QIC Ltd and the shares in QIC Ltd.

Provided all the conditions at S438A are met, Beta LLC will be treated as a QIC in relation to the loan it has made to QIC Ltd. The £80,000 interest expense arising to QIC Ltd will therefore qualify as an exempt amount and will be relieved in full for corporation tax purposes.

Commencement

The extension provided by S438A applies to accounting periods beginning on or after 1 April 2023.