In general, loan relationships held between connected companies are subject to the same corporation tax rules as those held between unrelated parties. However, there are a few specific rules that apply to connected companies.
Firstly, when calculating the taxable profits of a company, any profit or loss arising from a loan relationship with a connected company must be calculated using arm’s length terms. This means that the interest rate and other terms of the loan must be the same as those that would apply if the companies were not connected. If the terms are not arm’s length, the profits or losses must be adjusted to reflect what would have been the case if the terms were arm’s length.
Secondly, there are anti-avoidance rules that apply to connected companies that have loan relationships. These rules are designed to prevent companies from exploiting the tax system by transferring profits between connected companies via loan relationships. The rules apply where a company has a loan relationship with a connected company and there is a tax advantage to be gained by transferring profits between the companies. In such cases, the profits or losses arising from the loan relationship may be adjusted to reflect the commercial reality of the transaction.
Finally, there are specific rules that apply to companies that are members of a group. In particular, there are rules that govern the allocation of group relief for losses and the group relief for carried-forward losses. These rules are complex and depend on the specific circumstances of the companies involved.
It’s worth noting that these rules can be complex, and if you’re a company involved in loan relationships with connected parties, it’s important to seek advice from a tax professional to ensure that you’re complying with all the relevant regulations
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