CFM72680 – Corporate Finance Manual – HMRC Internal Manual

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Other tax rules

Transfer price

See INTM566010 for guidance on thin capitalization issues in securitization structures, and INTM430000 for more information on transfer pricing rules in general. A securitization company within regulation calculates its profit according to Regulation 14 and not based on its profit. It cannot self-assess an adjustment to these benefits under TIOPA10/Part 4, nor can such an adjustment be claimed by HMRC.

tax deduction

The normal rules that apply for the purposes of loan relationship and derivative contracts legislation apply to a securitization company, but as with other tax rules, they are then “turned off” when the tax charge on companies provided for by regulation 14 has just been applied (CFM72580).

ITA07/S980 explicitly excludes any requirement to deduct tax from a derivative contract. This applies to securitization companies as to any other company.

In most cases, payments between UK resident companies are exempt from the withholding tax rules in ITA07/S874 under ITA07/S930. It also allows for gross payment by UK companies to UK permanent establishments (PEs) of non-resident companies, where the PE is carrying on business and is taxable under CTA09/S5(2). A UK PE of a foreign special purpose vehicle, although unusual in practice, will fall into this category and UK payers will not be required to deduct tax from payments to such PEs.

Non-resident securitization companies

A non-resident company may qualify as a securitization company if, taking into account all of its activities in the UK and elsewhere, it falls within one of the definitions of the regulations. A non-resident securitization company can carry on business in the UK through a permanent establishment (CTA09/S5(2)). The company’s “undistributed earnings” under Regulation 10 (CFM72480) and tax liability under Regulation 14 (CFM72580) will be calculated as for any securitization company, taking into account all of its activities, whether carried on in the UK or elsewhere. The tax charge under Regulation 14 will be on the amount calculated under this Regulation, to the extent that it is attributable to the permanent establishment in the UK in accordance with CTA09/S5.

Annual payment {#}s – accounting periods beginning before January 1, 2018

The initial and deferred consideration for the securitized assets paid by the bond issuer to the originator will be taken into account as credit under the loan relationship regime. In some securitizations, rights to other payments (such as prepayment charges by mortgage holders) may be sold by the originator to third parties in the form of freely negotiable certificates. These “tailings financing structures” are a common feature of the securitization industry.

Although the payments made by the issuer following the transfer of the certificates to third parties have certain characteristics of annual payments (for example, they are payable under legal agreements and are subject to recurrence), they are generally not not pure income in the hands of the beneficiary, and will not be annual payments.

For accounting periods beginning before January 1, 2018, whether or not such payments should be treated as annual payments, and therefore may require a tax deduction, will depend on the facts of the case. It is likely that arrangements made “off-market” or in a particularly complex manner will require further investigation.

Removal of withholding tax requirement on annual payments – accounting periods beginning on or after January 1, 2018

SI2006/3296: regulation 14A

Regulation 14A, which was inserted by the Taxation of Special Purpose Companies (Amendment) Regulations 2018 (SI2018/143), removes the requirement under ITA07/S901 to withhold tax from any annual payment carried out by or on behalf of a securitization company. This change applies to those payments made in accounting periods beginning on or after January 1, 2018.

Further details on what constitutes an annual payment can be found in the Savings and Investments Handbook from SAIM8020.

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