CFM33205 - Loan relationships: core rules: amounts not brought into account: debt/equity swaps: debt for equity swaps on or after 9 November 2009
This guidance applies to debt/equity swaps on or after 9 November 2009.
CTA09/S322(6A) (previously CTA09/S322(4A))
{CFM33200} explains that CTA09/S322(4) provides an exemption from the taxable credit that would normally arise where a debt is released in consideration of ordinary shares in the company.
CTA09/S322(4) limits this, however, where the release is a 바카라 사이트˜release of relevant rights바카라 사이트™ under CTA09/S358(4), and takes place on or after 9 November 2009.
A 바카라 사이트˜release of relevant rights바카라 사이트™ arises where a connected company acquires the impaired debt of a connected company. Normally in such cases the debtor is subject to a credit in respect of a 바카라 사이트˜deemed release바카라 사이트™ on the difference between the face value of the debt and the amount paid by the connected creditor to acquire it (CFM35440). However, there are exemptions from the charge where the debt acquisition is part of a corporate rescue or a debt-for-debt exchange. If the debt is then released by the connected creditor, the amount that would have been brought in on the debtor as a 바카라 사이트˜deemed release바카라 사이트™ now crystallises as a 바카라 사이트˜release of relevant rights바카라 사이트™.{CFM35520} explains this further.
If a creditor company releases a connected debtor from a debt in consideration of the issue of ordinary shares by the debtor, and the debt is one that would have been subject to a tax charge on a release of relevant rights under CTA09/S358(4) had it simply been released, then CTA09/S322(4)/(6A) 바카라 사이트˜switches off바카라 사이트™ the normal exemption in section 322 for debt-equity swaps. In effect a company cannot escape the charge on a 바카라 사이트˜release of relevant rights바카라 사이트™ by using a debt-equity swap.
If such a release occurs after connection ceases, the normal operation of the loan relationships rules will give the result in the taxation of the same amount of the discount that would have been taxed had the parties remained connected, and no special rules are needed to determine the amounts brought into account.
Example
In the example at̀ưCFM35525, KJ Ltd pays £40,000 for debt with a face value of £100,000 owed by DS Ltd, and becomes connected with it. Normally a credit of £60,000 would be imposed on DS Ltd in respect of a 바카라 사이트˜deemed release바카라 사이트™, but if the 바카라 사이트˜corporate rescue exception바카라 사이트™ were to apply there is no deemed release under CTA09/S361. However, if KJ Ltd subsequently releases DS Ltd from its debt, DS Ltd will be taxed on a 바카라 사이트˜release of relevant rights바카라 사이트™ of £60,000 under CTA09/S358(4).
CTA09/S322(4)/(6A) ensures that a release of relevant rights will also arise if, instead of simply releasing the debt, KJ Ltd were to accept ordinary shares in DS Ltd in exchange for the debt.
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