Taxes Consolidation Act 1997 section 76E

Computation of profits and gains: deductions for interest paid by qualifying financing companies

Section 76E sets out how a qualifying financing company (QFC) can claim a deduction for interest paid on external borrowings that are on-lent to its trading subsidiaries, subject to strict matching rules and anti-avoidance provisions.

• A QFC is a company whose sole activity is borrowing from third-party lenders and on-lending to its 75% trading subsidiaries; it can deduct external interest paid against the interest income received from those subsidiary loans (known as relevant loans), provided the borrowed funds are used wholly and exclusively for trade purposes.
• External loans must come from persons who are neither associated enterprises nor holders of more than 5% of the QFC's ordinary share capital, and the amounts lent under external loans must be matched and traced to specific relevant loans at or around the time of borrowing.
• When a relevant loan is repaid — whether by actual repayment, disposal, write-off, or certain deemed repayment events such as share disposals or share capital buybacks — the interest deduction on the matched portion of the external loan ceases, unless the proceeds are re-lent as a replacement relevant loan that is itself properly matched.
• Comprehensive anti-avoidance rules deny the deduction where back-to-back loan arrangements, disguised capital payments, or any scheme whose main purpose is tax avoidance is in place, and the QFC must identify the matched relevant loans in its tax return to claim relief.