Corporation Tax Act 2009 section 696

Derivative contracts with non-UK residents

Section 696 restricts tax deductions where a UK company makes net notional interest payments to a non-UK resident party under a derivative contract, typically an interest rate swap.

• Where a UK company and a non-UK resident are both parties to a derivative contract providing for notional interest payments, the UK company cannot claim a tax debit for the excess of notional interest it pays over what it receives.
• The excluded debit is calculated as the amount by which total notional interest payments from the UK company to the non-UK resident exceed total notional interest payments flowing in the opposite direction during the accounting period.
• A notional interest payment is one determined by applying a rate to a specified notional principal amount for a specified period, where that rate matches the interest rate specified in the contract at all times.
• Certain exceptions to this restriction are provided by section 697.