Chapter INTM440100

CourtHM Revenue & Customs
Published date09 April 2016
Record NumberINTM440100

There will be situations where HMRC might challenge the absence of particular elements in relation to a transaction or a series of transactions.

Interest free loans

The classic example is an interest-free loan. It does not generally make commercial sense for a company to lend money on an interest-free basis. In a situation where the facts show that the loan is not performing the function of equity, the appropriate transfer pricing response would be to impute interest to reflect the reward the company would expect to receive if it were lending money to a third party (see INTM501010 onwards for more detail on interest imputation).

In such a situation a transaction is not being imposed - the transaction is the loan between the connected parties. However, the price of the transaction - a provision (see INTM412050) - is not arm’s length. The principle can be extended to other situations as well. These will usually involve the absence of written terms covering a particular transaction between connected persons. The transaction itself will be there - once it is identified it will necessary to establish whether the company is being properly rewarded for its functions and risks involved in the transaction.

Trade marks

Consider the following example:


Overseas parent owns the trade mark, patents and associated intellectual property of a range of digital radios. The trade mark is well known in North America, and the group now wants to launch it in Europe - the UK has been chosen as the first European market. The rights are sub-licensed to a subsidiary (‘Company A’), resident in a low tax territory, who in turn sub-licence to a group company (‘Company B’) in a country with a favourable regime for paying royalties. Company B grants the UK group company (‘UK Distributor’) a 5-year licence to manufacture and distribute the goods in the UK. The licence is renewable thereafter for periods of 12 months at a time. As the trade mark is unknown in the UK, UK Distributor has to spend a lot to promote and establish the trade mark and the reputation and goodwill for the associated products in its territory, and then maintain that goodwill. This involves significant sponsorship of high profile celebrities; favourable sale and return terms and discounts to retailers; extensive advertising and promotional events.

The results for the UK Distributor are as follows:

31/12/08 31/12/09 31/12/10 31/12/11 31/12/12 31/12/13

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