Introduction Details of the Schedule Part 5 – Intra group financing income where payer denied deduction
77.Subject to conditions, Part 5 allows intra-group financing income received from a company resident in the EEA, excluding the UK, to be exempt from corporation tax. To the extent that tax relief is not available for finance costs within the EEA excluding the UK, like consequences follow for the recipient of the income to provide equivalence with an outcome arising from the other Parts of this Schedule.
78.Paragraph 40 gives exemption for an amount of financing income received from a group company that is resident in the EEA excluding the UK. Exemption is subject to meeting all the conditions A to C, which are defined in the following paragraphs.
79.Paragraph 41 defines ‘relevant associate’ for the purposes of this Part. Condition A of paragraph 40 requires the payer to be a relevant associate of the recipient of the financing income.
80.The payer is a relevant associate if it is a parent company or subsidiary of the recipient or a 75% subsidiary of the parent of the recipient. The term ‘parent company’ is defined in paragraph 92 by reference to International Accounting Standards (IAS) and the terms ‘75% subsidiary’ is defined in section 838(1)(b) of the Income and Corporation Taxes Acts (ICTA) by reference to the proportion of ordinary share capital held.
81.Paragraph 42 defines ‘tax resident’ and ‘EEA territory’ for the purposes of Part 5. Condition B of paragraph 40 requires the payer to be a tax resident of an EEA territory.
82.Paragraphs 43 and 44 define the two elements of condition C of Paragraph 40. Both parts of condition C must be met to fulfil the condition that no relief is available in respect of the financing income.
83.Paragraph 43 defines the requirement set out in the first part of condition C of paragraph 40, which is the requirement that qualifying EEA relief is not available to the payer of the financing income in the current period or any preceding period by reason of the payment. There are two conditions A and B in this paragraph that must both be met in order for this requirement to be satisfied.
84.Sub-paragraph (2) explains that condition A is that no deduction in respect of the payment can be taken into account for the purposes of calculating the taxable profits of the payer in the current period or any preceding period. The current period is the period in which the payment is made (paragraph 40(4)(a)) and taxable profits means the profits taken into account for the taxation purposes of any EEA territory including the UK.
85.Sub-paragraph (3) explains that condition B is that no tax credit or other form of tax relief whatsoever is given to the payer or any other person that is determined by reference to the payment, in the current period or any previous period.
86.Sub-paragraph (4) explains that conditions A and B are not met if there was any step that the payer or any other person could have taken that would have caused the payment to be taken into account as described above.
87.Conditions A and B are also not met if, in certain circumstances, the payment was not taken into account as described above because of this Schedule.
88.Sub-paragraph (5)(b) explains that the Conditions are not met if the payer was denied a deduction or relief in respect of the payment due to provisions in a double taxation treaty. This could be where either the denial of the deduction in the EEA territory is sanctioned by the associated enterprises article of a DTA between that territory and the UK; or where a DTA between the EEA territory and another territory applies to determine which territory has taxing rights in respect of the profits, income or gains whose calculation takes into account the payment in question.
89.Sub-paragraph (6) explains what is meant by double taxation agreements and articles contained in those agreements.
90.Paragraph 44 sets out the second requirement of condition C in paragraph 40. It is very similar to the first requirement described in paragraph 43 above, except that it refers in each case to any future period.
91.Condition A therefore refers to no deduction being given in respect of the payment being taken into account in the computation of any profits that might arise and be chargeable in the EEA territory in any future period. Condition B asks whether any form of relief will become available in any future period, but in answering this question it is sufficient to consider only the position at the end of the current period.
92.As with paragraph 43, this Schedule and the provisions of double taxation agreements are both disregarded when considering conditions A and B.
93.Paragraph 45 defines the term ‘tax’ for the purposes of the Schedule. UK tax refers to corporation tax or income tax and tax of any other territory refers to taxes that are equivalent to either of these two taxes. A tax is not disqualified solely because it is charged by any regional tax authority, such as the German Länder.
94.Paragraph 46 defines the term ‘financing income amount’, which is the term used in paragraph 40 to describe the amount that is exempt from tax in the hands of a company subject to conditions A to C of that paragraph. A financing income amount is an amount that falls within any of conditions A to C in this paragraph.
	condition A refers to any amount taxed under loan relationships legislation except the matters described in sub-paragraph (3)
	condition B refers to a receipt corresponding to the finance element of a finance lease; and
	condition C refers to a receipt corresponding to the finance element of a debt factoring arrangement.
95.For this purpose sub-paragraph (6) provides for the provisions of Part 7 to apply in relation to an amount which is a financing income amount by virtue of meeting condition A, B or C in this paragraph in the same way as they do for a financing income amount that meets condition A, B or C in paragraph 48.