Chapter 8Returns from partnerships
536Introduction to Chapter
(1)This Chapter applies if a company is a party to certain arrangements involving a firm of which it is a member.
(2)Under the following provisions of this Chapter the return designed to be produced for the company by the arrangements is treated as a profit from a loan relationship for the purposes of Part 5—
(a)section 537(3) (payments in return for capital contribution to partnership), and
(b)section 538(3) (change of partnership shares).
(3)In this Chapter “arrangements” includes any scheme, agreement, understanding, transaction or series of transactions.
537Payments in return for capital contribution to partnership
(1)This section applies if a company is a party to relevant arrangements under which—
(a)a firm of which it is a member is or may become entitled to receive a capital contribution from any person (whether directly or indirectly), and
(b)that person, or a person connected with that person, receives a sum of money or other asset from the company (whether directly or indirectly).
(2)In subsection (1) “relevant arrangements” means arrangements—
(a)which are designed to produce for the company a return which equates, in substance, to a return on the investment of the money or other asset at a commercial rate of interest, and
(b)of which the purpose, or one of the main purposes, is to secure a tax advantage.
(3)The return is treated for the purposes of Part 5 as a profit from a loan relationship of the company.
(4)The credits to be brought into account in respect of the loan relationship are to be determined on the amortised cost basis of accounting.
(5)Subsection (6) applies if the return to any extent represents profits of the firm in respect of which the company is chargeable to corporation tax (whether for the same or any earlier accounting period).
(6)The charge to corporation tax is to be reduced to such extent as is just and reasonable.
538Change of partnership shares
(1)This section applies if a company is a party to relevant arrangements under which—
(a)it makes a capital contribution to a firm of which it is a member,
(b)profits of the firm fall to be shared in such a way that the company is not allocated the whole of its due share of the profits (see subsection (7)), and
(c)the capital of the firm falls to be shared in such a way that the company or a person connected with the company is entitled to more than the whole of the company’s due share of the capital (see subsection (7)).
(2)In subsection (1) “relevant arrangements” means arrangements—
(a)which are designed to produce for the company a return which equates, in substance, to a return on the investment of the capital contribution at a commercial rate of interest, and
(b)of which the purpose, or one of the main purposes, is to secure a tax advantage.
(3)The return is treated for the purposes of Part 5 as a profit from a loan relationship of the company.
(4)The credits to be brought into account in respect of the loan relationship are to be determined on the amortised cost basis of accounting.
(5)Subsection (6) applies if the return to any extent represents profits of the firm in respect of which the company is chargeable to corporation tax (whether for the same or any earlier accounting period).
(6)The charge to corporation tax is to be reduced to such extent as is just and reasonable.
(7)For the purposes of subsection (1) a company’s “due share” of any profits or capital is the share which the company would have been allocated or entitled to if allocation or entitlement were determined by reference to the proportion of the total capital contributed to the firm which was contributed by the company.