Corporation Tax Act 2009 section 931M

Schemes in the nature of loan relationships

Section 931M is an anti-avoidance rule that removes the distribution exemption where a dividend or distribution arises from a tax advantage scheme and the arrangement produces a return that is economically equivalent to interest, provided the payer and recipient are connected.

• Distributions that would otherwise be exempt (but not those exempt under the controlled companies rule in section 931E) lose their exempt status if they form part of a tax advantage scheme
• The return produced by the scheme must be economically equivalent to interest — meaning it represents a time-value-of-money return, at a rate reasonably comparable to a commercial interest rate, with no practical likelihood of ceasing under the terms of the scheme
• The rule only applies where there is a connection between the payer and the recipient during the accounting period in which the distribution is made, using the loan relationships definition of connected companies
• The broader loan relationships definition of "connection" is used deliberately, to catch cases where loan relationship rules have been sidestepped through a connected person rule but where the controlled foreign company rules might not apply due to the recipient not controlling the payer