Revenue Note for Guidance

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Revenue Note for Guidance

76E Taxation of Certain Qualifying Financing Companies

Summary

The purpose of the provision is to allow a qualifying company, referred to as Qualifying Financing Company (QFC) in this section, obtain a deduction for interest paid to an external or third party financier (external interest), on a loan from that financier where:

  • the activities of the QFC relate wholly to the making of the qualifying business loans to certain qualifying subsidiaries in which it holds 75% or more of the share capital (such loans are referred to as relevant loans), and
  • the external interest paid by the QFC can be matched against interest income received in respect of a relevant loan or loans advanced by the QFC,

subject to strict qualifying criteria and anti-avoidance rules being met.

Details

Definitions

(1) “arrangements” refers to any agreement, understanding, scheme, transaction, or series of transactions (whether enforceable or not);

“associated enterprise”, refers to an enterprise that is an associated enterprise of a company for the purposes of Chapter 4 of Part 35C (i.e. where the entities are associated enterprises for the purposes of that Chapter);

“control” is to be construed in accordance with section 432;

“EEA State” means a state, not being a Member State or the State, which is a contracting party to the Agreement on the European Economic Area signed at Oporto on 2 May 1992 as adjusted by the Protocol signed at Brussels on 17 March 1993;

“enterprise” has the same meaning as in Part 35C;

“external interest” means the amount of interest payable on an external loan;

“external loan”, subject to subsection (11), in respect of a company, means a loan from a person who—

  • does not have the beneficial ownership of, or the ability to control (directly or indirectly) more than 5 per cent of the ordinary share capital of the company, and
  • is not an associated enterprise of the company;

“indirect qualifying subsidiary” refers to any company that would be a qualifying subsidiary for the purposes of this section, but for the fact that 75 per cent or more of its ordinary share capital is held directly by an intermediate holding company;

“intermediate holding company” refers to a company—

  • in which a QFC holds a direct ownership of at least 75% of the ordinary share capital of the company, and
  • whose business consists wholly of the holding of ordinary shares of indirect qualifying subsidiaries of the QFC.

“qualifying financing company” (or QFC) means a company that—

  • directly holds at least 75% of the ordinary share capital of one or more than one:
    • qualifying subsidiary, or
    • intermediate holding company
  • borrows money for the purpose of on-lending that money by making relevant loans to its qualifying subsidiary or indirect qualifying subsidiary (or subsidiaries as the case may be), and
  • apart from activities ancillary to the above, carries on no other activities;

“qualifying subsidiary” in respect of a QFC refers to a company—

  • that exists wholly or mainly for the purpose of carrying on any trade or trades
  • that is tax resident in a Member State, EEA State or a DTA jurisdiction, and
  • in which the QFC directly holds at least 75% of the ordinary share capital of the company;

“relevant loan” refers to a monetary loan (entered into by way of a bargain at arm’s length) that is—

  • advanced by a QFC to its qualifying subsidiary or indirect qualifying subsidiary, and
  • used by the qualifying subsidiary or indirect qualifying subsidiary wholly and exclusively for the purposes of a trade, but such use cannot extend to the use of any amount of money for—
    • the redemption of or subscription for shares, or
    • any other payments relating to shares or the capital structure of any company.

Repayments and deemed repayments to QFCs

(2)&(3) Subsection (2) sets out the scenarios where a relevant loan will be treated as repaid to a QFC. These include:

  • actual repayment scenarios i.e.
    • the repayment of the loan, or part of the loan, by a qualifying subsidiary or indirect qualifying subsidiary as the case may be, or
    • the disposal by the QFC of its interest in the loan, (with the amount treated as repaid for the purposes of subsection (5)(a) being the higher of the outstanding principal and the market value of the loan)
  • certain events which are deemed repayment events for recovery purposes, being either:
    • the full or partial write-off/forgiveness of a relevant loan,
    • a sale of shares that results in a subsidiary or indirect subsidiary no longer qualifying and the loan in turn is no longer a relevant loan (with the amount treated as repaid for the purposes of subsection (5)(a) being the higher of the outstanding principal and the market value of the shares), or
    • the repayment, redemption of or purchase of share capital by the qualifying subsidiary or indirect qualifying subsidiary (with the amount so repaid, redeemed or purchased being deemed to be the amount of the loan repaid).

Interest relief for QFCs (relief by deduction)

(4) A QFC, in calculating its taxable profits under Case III or Case IV, is entitled to deduct the third-party interest paid in a chargeable period where the third-party interest paid is matched against interest income received from a relevant loan (or loans).

(5) No deduction for third-party interest is available where the matching relevant loan has been repaid (or deemed repaid under subsection (2)) to the QFC unless:

  • the proceeds of that repayment are used by the QFC to make further relevant loans (known as replacement loans), and
  • the replacement loans are matched to the third-party debt for which the interest was paid,

(6)(b) No deduction is available where the repayment is deemed to arise from the disposal or redemption of shares by a QFC.

Matching principles for QFCs

(6)(a) Interest paid by a QFC on third-party debt is to be automatically matched with the interest arising on the relevant loans made by the QFC at or around the time the third-party debt was borrowed by the QFC.

(6)(b) Where a relevant loan is repaid (other than a deemed repayment by way of the sale or redemption of shares in a company to whom the relevant loan was made or an intermediate holding company) and replaced with a replacement relevant loan (or loans), the replacement shall be matched to the lower of:

  • the third-party loan (or unmatched proportion thereof) against which the original relevant loan was matched, and
  • the money actually received.

(6)(c) The total amount of relevant loans matched with external loans cannot exceed the total value of external loans held by the QFC.

(6)(d) On 1 January 2024, all existing external loans shall be matched with existing relevant loans in a manner consistent with the rules for matching set out in this subsection.

(7) Where a relevant loan that has been matched with an external loan (or portion thereof) and that external loan is subsequently refinanced, the new third-party loan shall be matched to the same relevant loans (or portion thereof).

Anti-avoidance rules

(8) A QFC is precluded from deducting third-party interest where the matched relevant loan was made to a subsidiary who would be restricted by section 81 from claiming a deduction for third-party interest if they had opted to borrow directly from the third party instead of via the QFC.

(9) A QFC is precluded from deducting third-party interest under this section where the interest is deductible under any other provision of the Acts.

(10) This section is precluded from applying in scenarios where the payment of the third-party interest forms part of an avoidance arrangement.

(11) The section includes a number of provisions against the making of back-to-back loans in order to access a deduction for interest paid. The provision counters a number of arrangements where interest is routed through a third party so that the interest (which would not qualify as deductible by a QFC if it was paid to a connected company) would be treated as if it were deductible third-party interest.

The specific arrangements addressed are as follows:

  1. Arrangements where:
    • interest is payable by a QFC to another enterprise such that the exclusion for third-party debt applies only because the QFC and that enterprise are not associated, and
    • interest is payable by some other enterprise not associated with the QFC to an enterprise which is associated.
  2. Arrangements where:
    • interest is payable by a QFC to another non-associated enterprise, and
    • that non-associated enterprise has either:
      • been advanced money by a different enterprise which is associated with the QFC, or
      • received a deposit from a different enterprise associated with the QFC.
  3. Arrangements entered into in relation to a QFC and the effect of those arrangements is that any amount has been advanced or made available indirectly from an associate of a QFC to the QFC, or that interest is paid indirectly by a QFC to an associate.
  4. Arrangements where:
    • associates of a QFC advance or make available amounts to a second QFC that they are not associated with, and
    • associates of that second QFC advance or make available amounts to the first mentioned QFC,
    and those QFCs or associates are acting together.

(12) This section only provides relief for third party interest paid by a QFC where the QFC identifies the relevant loan against which the interest is matched in their tax return.

(13) In scenarios where a qualifying subsidiary or qualifying indirect subsidiary has made a disguised capital payment to the QFC (whether directly or indirectly),

  • the amount shall be treated as a repayment of the relevant loan by the subsidiary, and
  • the QFC shall have no interest relief on the repayment of the corresponding third-party loan.

Relevant Date: Finance Act 2024