Corporation Tax Act 2010 section 763

Type 2 finance arrangement defined

Section 763 defines what constitutes a "type 2 finance arrangement", a structured financing mechanism that uses a partnership and an asset transfer to disguise what is, in substance, a secured loan.

• A transferor disposes of an asset (the security) to a partnership and remains (or becomes) a member; the partnership then receives money or another asset (the advance) from a lender, creating what is economically a secured borrowing channelled through the partnership structure.
• A "relevant change" must occur in relation to the partnership — broadly, the lender or a connected person joins the partnership or obtains an altered profit share — and that person's share of partnership profits must be determined wholly or partly by reference to payments linked to the transferred asset.
• The partnership (or the transferor) must record a financial liability for the advance under generally accepted accounting practice (GAAP), and the payments linked to the security must reduce that liability — confirming they are repayments of principal rather than distributions of profit.
• Both conditions (A covering the commercial terms and B covering the accounting treatment) must be satisfied for the arrangement to be caught; if they are, the anti-avoidance rules in this Chapter apply to ensure the arrangement is taxed in line with its true economic substance as a loan.