Taxation (International and Other Provisions) Act 2010 section 153

Arm's length provision where security issued and guarantee given

Section 153 deals with how the arm's length principle applies where one connected company issues a security (such as a bond or loan note) and the other connected company provides a guarantee in respect of that security.

• When determining the arm's length position, all factors must be considered, including whether the guarantee would have existed at all, the amount that would have been guaranteed, and the terms that would have applied, if the companies had been independent of each other.
• If the company providing the guarantee does not normally carry on a business of providing guarantees, that fact must be ignored — meaning the guarantee is still assessed on arm's length terms rather than being disregarded simply because it falls outside that company's usual activities.
• When assessing the issuing company's appropriate level of borrowing, whether a particular loan transaction would have taken place, and the interest rate and other terms of any such transaction, no account may be taken of any guarantee provided by a company with which the issuing company has a participatory relationship (broadly, a relationship involving direct or indirect ownership or control).
• The effect of this rule is that the issuing company's creditworthiness and borrowing capacity must be evaluated on a standalone basis, without the benefit of any group guarantee, when determining arm's length debt levels and loan terms.