Corporation Tax Act 2009 section 446A

Non-market loans

Section 446A restricts the tax deductions a borrowing company can claim where a loan is initially recognised in its accounts at less than the amount actually borrowed, and the resulting discount is not fully taxed in the hands of the lender.

• Where a company borrows money and records the loan liability at less than the transaction price, an accounting "discount" arises representing the difference between the two amounts
• If credits for all or part of that discount are not brought into account for loan relationships purposes — and where the lender is either a non-corporate or a company in a non-qualifying territory — the borrower's tax deductions are restricted
• The restriction removes from the borrower's allowable debits the amount relating to the unwind of the discount (or the unrecognised portion of it) as it accrues over the life of the loan
• A corporate lender triggers the restriction only if it is tax-resident in, or effectively managed in, a non-qualifying territory — broadly, a jurisdiction that does not have a qualifying double tax agreement with the UK or is a territory where companies are not subject to tax