CFM72700 – Corporate Finance Manual – HMRC Internal Manual

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Investor taxation

The main cash flows of a securitization are the claims on the securitized assets and the interest paid on the bonds issued to investors. It is common for a portion of this interest to be payable on limited recourse terms. In other words, if the company issuing the notes does not have sufficient funds, the interest due on the securities automatically decreases.

Tax laws provide for interest to be reclassified as a distribution in certain circumstances. CTA10/S1015 (4) (redefines interest based on business results, and CTA10/S1005 applies to interest paid at a rate above a reasonable commercial rate.

Regulation 16 provides that paragraphs B to F of CTA10/S1000 do not apply to interest paid by a securitization company. Thus, all sums paid by the company, other than conventional dividends, will remain interest and will be taxed as such at the beneficiary’s, and only conventional dividends will give rise to a tax credit.

Rule 16 does not apply if the company has been excluded from the securitization regime due to failure of the payment condition or the unauthorized purpose test (CFM72570). In such a case, the company will remain a securitization company for regulatory purposes, except for rule 14. It will be taxed on its book profit in the usual way and the interest it pays may be reclassified as a distribution. in accordance with CTA10/S1015 to S1017.

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