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UK vs JTI Acquisitions Company (2011) Ltd, August 2023, Upper Tribunal, Case No [2023] UKUT 00194 (TCC)

Posted on August 7, 2023 | By Courts of the UK | No comments

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JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate.

The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose.

Judgment of the Upper Tribunal

The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal.

According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative.

Related Guidelines

TPG2022 Chapter X paragraph 10.80The impact of an assessment of implicit support is a matter of judgment. The kind of information on which the MNE group would base a decision of whether or not to provide support to a borrower in particular circumstances may not be available to a tax administration, as is frequently...

TPG2022 Chapter X paragraph 10.79Another key consideration would be the likely consequences for other parts of the MNE group of supporting or not supporting the borrower. The criteria used to determine the status of an entity in this regard may include such considerations as legal obligations (e.g. regulatory requirements), strategic importance, operational integration and...

TPG2022 Chapter X paragraph 10.78Implicit support from the group may affect the credit rating of the borrower or the rating of any debt which it issues. The relative status of an entity within the group may help determine what impact that potential group support has on the credit rating of a debt issuer. Entities...

TPG2022 Chapter X paragraph 10.77In the context of intra-group loans, this incidental benefit that the MNE is assumed to receive solely by virtue of group affiliation, is referred to as implicit support. The effect of potential group support on the credit rating of an entity and any effect on that entity’s ability to borrow...

TPG2022 Chapter X paragraph 10.76The effect of group membership is relevant for informing the conditions under which an MNE would have borrowed from an independent lender at arm’s length in two ways in particular. Firstly, the external funding policies and practices of group management will assist in informing the form and terms and conditions...

TPG2022 Chapter X paragraph 10.75In conducting a credit rating analysis, it is important to note that the financial metrics may be influenced by current and past controlled transactions (such as sales, or interest expenses). If it appears that such controlled transactions are not in accordance with the arm’s length principle, the credit rating derived...

TPG2022 Chapter X paragraph 10.74For these reasons, the reliability of credit rating results derived from the use of publicly available financial tools may be improved to the extent the analysis can reproducibly demonstrate consistency of ratings using such tools with those provided by independent credit rating agencies....

TPG2022 Chapter X paragraph 10.73The credit rating methodology used in publicly available financial tools may differ significantly in certain respects from the credit rating methodologies applied by independent credit rating agencies to determine official credit ratings and the impact of any such differences should be carefully considered. For instance, publicly available tools generally use...

TPG2022 Chapter X paragraph 10.72Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then be compared to a market database in...

TPG2022 Chapter X paragraph 10.71Particular considerations should be borne in mind when determining a credit rating for a specific MNE within an MNE group for the purpose of assessing controlled transactions. Where an MNE has a publicly available credit rating published by an independent credit rating agency, that rating may be informative for an...

Supplemental Guidance

UK vs BlackRock, April 2024, Court of Appeal, Case No [2024] EWCA Civ 330 (CA-2022-001918)BlackRock's UK subsidiary claimed interest deductions on $4bn intra-group loans used to fund the 2009 acquisition of Barclays Global Investors. HMRC denied relief under UK transfer pricing rules and the unallowable purpose rule. The Court of Appeal ruled in favour of HMRC in 2024, finding that an arm's length lender...

UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)BlackRock Holdco 5 LLC claimed UK tax deductions for interest on $4bn intra-group loans used to fund the 2009 acquisition of Barclays Global Investors. HMRC disallowed the deductions, finding the loans served an unallowable tax avoidance purpose under section 441 CTA 2009. The UK Upper Tribunal upheld HMRC's position in...

UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920BlackRock Holdco 5 LLC, a US entity tax resident in the UK, claimed interest deductions on $4bn intra-group loans used to fund the 2009 acquisition of Barclays Global Investors. HMRC disallowed the deductions, arguing the loans served an unallowable tax avoidance purpose under section 441 CTA 2009. The UK First-tier...

UK vs Kwik-Fit, May 2024, Court of Appeal, Case No [2024] EWCA Civ 434 (CA-2023-000429)A UK group restructured intra-company balances to accelerate tax loss utilisation, creating an intra-group loan. HMRC disallowed interest deductions under the unallowable purpose rule in section 441 CTA 2009, arguing tax avoidance was the main purpose. The Court of Appeal upheld decisions of the First-tier and Upper Tribunals in 2024,...

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSBA Portuguese single-member company took out two intra-group loans to acquire a 70% stake in a group holding company and claimed interest deductions. The tax authority disallowed the deductions, finding the transactions lacked genuine business purpose. Portugal's Supreme Administrative Court dismissed the taxpayer's appeal in 2023, confirming that the loans...

Portugal vs “A…, Sociedade Unipessoal LDA”, January 2021, CAAD Administrative Tribunal, Case No 827/2019-TA Portuguese company took out two intra-group loans to acquire a 70% shareholding in a group holding company and deducted the resulting interest expenses. The tax authorities disallowed the deductions, arguing the transactions lacked a genuine business purpose. The CAAD Administrative Tribunal upheld the tax authority's assessment in January 2021,...

Portugal vs “B Lender S.A”, January 2021, Supremo Tribunal Administrativo, Case No JSTA000P26984A Portuguese company provided an interest-free supplementary capital contribution to a related entity. The tax authority recharacterised the transaction as an interest-bearing loan under arm's length provisions, assessing additional income of over EUR 1.5 million. The lower tax court upheld the assessment. On appeal, Portugal's Supreme Administrative Court set aside...

Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STS 3730/2020 – ECLI:EN:TS:2020:3730A Spanish subsidiary of Jacobs Douwe Egberts claimed tax depreciation deductions on an intra-group share acquisition. The tax authority challenged the deductions, arguing the transaction lacked economic substance and constituted tax avoidance. The Tribunal Superior de Justicia upheld the National Court's ruling in favour of the tax authority in 2020,...

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UK vs JTI Acquisitions Company (2011) Ltd, August 2023, Upper Tribunal, Case No [2023] UKUT 00194 (TCC)

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