Corporation Tax Act 2010 section 766

Deemed loan relationship

Section 766 explains how a type 2 finance arrangement is treated as a loan relationship for corporation tax purposes, so that loan relationship rules apply to the advance and any associated finance charges.

• Where there is a type 2 finance arrangement and the transferor is a company within the charge to corporation tax, the advance is treated as a money debt owed by the partnership, and the arrangement is treated as a lending transaction giving rise to that debt.
• Any finance charge recorded in the partnership's accounts (or the transferor's accounts) in respect of the advance, in accordance with generally accepted accounting practice, is treated as interest payable by the company under the deemed lending transaction.
• To determine when the deemed interest is paid, the payments under the arrangement are split into two components: amounts repaying the advance and amounts representing interest on the advance (called "the interest elements").
• The deemed interest is treated as paid at the same time as the interest elements of the payments are treated as paid — that is, when the actual payments themselves are made.