Disguised interest
The measure
Legislation is to be introduced to tax as income any amount which is 'economically equivalent' to interest as if it were a profit arising to the company from a loan.
Who will be affected?
This measure is targeted at large companies that enter into arrangements to avoid tax on returns from investments that are economically equivalent to interest.
We expect the legislation to be enacted in substantially the same form as the draft rules released in November 2008 during the extensive consultation process. These contain two exclusions from the new rules where:
- it is not the main purpose, or one of the main purposes, of the arrangement to secure that the return is not chargeable as income for corporation tax purposes; or
- the 'interest' return arises solely from an increase in the value of shares in a connected company or certain joint venture companies.
When?
The rules are effective for arrangements entered into on or after 22 April 2009.
The rules provide a transitional period for most existing arrangements, excluding those that are (or would) fall within the existing rules targeting disguised interest (the 'shares as debt' rules).
Most of the detail of these proposals was released in November 2008 following
the Pre-Budget Report. The Budget notes summarise the position and indicate that
the details behind it remain unchanged from the latest published draft.
This included extending the exclusion for connected companies to shares in
non-connected controlled foreign companies. The draft rules also contained a
separate sub-set of provisions targeted at disguised interest on shares
accounted for as liabilities; (including an exclusion for connected companies
and a purpose test).
