Taxation (International and Other Provisions) Act 2010 section 131

Interpreting provision about interest influenced by special relationship

Section 131 explains how provisions in double taxation agreements dealing with interest payments should be interpreted where the amount of interest has been inflated because the payer and recipient have a special relationship.

• Where a double taxation agreement contains a "special relationship rule" for interest, the rule must be read broadly, taking into account all relevant factors — not just the interest rate, but also whether the loan would have existed at all without the relationship, and the amount that would have been lent
• This broad interpretation does not apply if the special relationship rule in the particular agreement expressly limits the factors to be considered to only the debt on which interest is paid
• If a company makes a loan to a related company but lending is not part of its normal business, that fact must be ignored when applying the broad interpretation — the analysis proceeds as if the lender could have made the loan regardless
• The burden of proof falls on the taxpayer, who must either demonstrate that no special relationship exists, or, if one does exist, show what amount of interest would have been paid had the relationship not existed