Preventing tax advantages through connected party debt

Individuals who fund a connected company with debt, either directly or through a partnership (including private equity LPs), will no longer be entitled to a reduction in their taxable earnings where the company suffers a transfer pricing charge relating to the interest on that debt.

In addition, the individuals concerned will be taxed as if they had received a dividend equal to the ‘excess’ interest.

HM Revenue & Customs has published draft legislation, taking effect from 25 October 2013, to prevent the perceived abuse of the transfer pricing ‘compensating adjustment’ rules…

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