Taxation (International and Other Provisions) Act 2010 section 152

Arm's length provision where actual provision relates to securities

Section 152 addresses "thin capitalisation" — the rules that apply when determining whether loans between connected companies reflect what would have happened at arm's length.

• Where a security is issued between two connected companies, the arm's length test must consider whether the loan would have been made at all, the amount that would have been lent, and the interest rate and other terms that would have applied, if the parties had no special relationship.
• If the lending company does not ordinarily carry on a business of making loans, that fact is ignored when assessing the arm's length position — the test focuses on the terms of the loan itself rather than the lender's general business activities.
• Any guarantee provided by a company that has a participatory relationship with the issuing company must be disregarded when determining the appropriate level of the issuing company's debt, whether the loan would have been made, or the applicable interest rate and terms.
• These rules ensure that intra-group lending arrangements are tested against genuinely independent market conditions, preventing groups from over-leveraging subsidiaries through related-party loans on non-commercial terms.