Union Castle Ltd. claimed a tax deduction of £ 39 million related to losses on derivative contracts.
After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts.
The tax authorities disagreed that a tax loss had been suffered and issued an assessment disallowing the loss.
The Tribunal found in favor of the tax authorities.
- Capital transactions are subject of the UK transfer pricing rules.
- Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention.
- OECD TPG apply to debt financing.
- Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules.
Union_Castle_Mail_Steamship_Company_Ltd_and_HMRC