Corporation Tax Act 2009 section 407

Postponement until redemption of debits for connected companies' deeply discounted securities

Section 407 provides that where a company issues a deeply discounted security to a connected party, any debit (expense) arising from the discount is not recognised for corporation tax purposes until the security is actually redeemed.

• When a company issues a deeply discounted security to a connected company, the normal timing rules for recognising the borrowing cost (debit) are overridden.
• Instead of spreading the discount over the life of the security, the full debit is postponed and only brought into account when the security is redeemed.
• This prevents the issuing company from obtaining a tax deduction for the accruing discount while the connected creditor may not yet be taxed on the corresponding income.
• The rule ensures symmetry in the tax treatment between connected parties by aligning the timing of the borrower's deduction with the point at which the security is actually repaid.