Can a foreign company repay UK company debt?

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Hi there

Please help me with the following situation, which I find a bit difficult to understand and can't seem to get a straight answer to:

Company X is a UK limited company, but owned by foreign Company Y. Company X has received investments from a single Investor in the UK, which must be repaid with interest. Currently, there is a loan reflected in Company X owing to the Investor.

Foreign Company Y wishes to settle the debt of its subsidiary directly with the investor (i.e not first transfer funds internationally to Company X in the UK). This can be done from Company Y's foreign business account to the Investor's foreign private account. The investor is a citizen of the foreign country and the transaction can be done legally in the foreign country. The investor would be repaid and Company X's debt would be settled. Doing the transaction this way will speed up the cross border process and get the funds to the investor quicker.

Company X will settle a debt showing in its accounts by replacing the debt with a loan between Company X and Company Y. I believe these two Companies to be "Connected parties" (Company Y is the only shareholder of Company X), so what consequences would this carry in terms of HMRC and the new loan created between the two companies?

Thanking you in advance. 

Replies (9)

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By johngroganjga
07th Nov 2019 15:06

You are overthinking. The entry required in X’s books is to debit the liability to the investor being repaid on behalf of X by Y, and to credit Y, to recognise the amount owing to it by X. That is all.

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By lesley.barnes
07th Nov 2019 16:03

Is the investor your client? If he isn't I would tell him to speak to his own accountant. If he is your client you would need to post more details about the
transaction. You mention interest usually the tax on the interest is deducted before payment, a CT61 completed and sent to HMRC along with the tax. The investor would declare his interest plus the amount of tax deducted on his tax return. So would CGT be applicable in this case? How much interest is involved?

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By Matrix
07th Nov 2019 16:01

I agree with the above - 20% tax should be deducted from the interest, I don’t know why you ask about CGT and we need to know which one is your client.

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paddle steamer
By DJKL
07th Nov 2019 16:12

One other area that requires some thought is ,does the way the transaction is proposed to be structured, with no funds coming into/out of UK, raise any MLR suspicions, or maybe ought it?

I say this as paranoia abounds e.g. today I settled a company invoice with a firm of solicitors we use. Our company has gone through the money laundering process with them previously, notwithstanding they wanted to know the account number and sort code of the account used to settle their fee (which was only about £450) and I am still trying to really work out why.

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Replying to DJKL:
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By johnhemming
08th Nov 2019 07:15

I wonder also if there is a potential preferring creditors issue if the subsidiary is in some way insolvent and dependent upon support from the holding company or indeed that the bank accounts are overdrawn and the funds would not make it out of the accounts in full.

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By AccLondon
07th Nov 2019 16:22

Thank you for your replies. Company X is the client. I'm just trying to find the best answer to help them make a decision on how to move forward. The investor will speak to his own accountant. The main concern here is as suggested MLR and HMRC issues for Company X, if any.

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By whitevanman
07th Nov 2019 16:47

As often happens, we have a question with insufficient facts!
That said, here's a bit of speculation:
Say investor Mr A lends £10 to UK company X at interest.
Mr A is also UK tax resident. He therefore needs to ensure he correctly returns the interest he receives. As others have said, X needs to deduct and account for tax under the CT61 procedure.
A problem may arise if the interest is simply rolled-up.
Say the loan has been outstanding for a little while and accumulated interest is £2.
At that time, foreign parent takes over the debt of £12. The entries in the books of X are as described in the first reply but when Y pays Mr A his £12, what about tax on the interest? A non-UK resident company is not within the CT61 process.
The question is, what has actually happened to the debt between X and Mr A?
Has it been novated or has Y simply made payment on behalf of X or some other arrangement?
I would suggest (though we dont have the facts) that X should proceed as though it had paid interest to Mr A and account for tax on the £2 paid over by Y.
One does not usually realise a CG when a loan is repaid so there is unlikely to be any further issue for Mr A (as long as he correctly returns the interest).
You then have a loan of £12 between X and Y. They are probably connected persons for loan relationship purposes. Also, if X pays interest on the £12 going forward, again tax will have to be deducted but Y could apply for gross payment if permitted by the relevant DT agreement (assuming there to be one).
Of course, all this could be wrong.

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Replying to whitevanman:
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By Tax Dragon
08th Nov 2019 06:46

whitevanman wrote:

Of course, all this could be wrong.

Sounds a pretty good stab in the dark though.

You mention novation. That might be an option for a simple, unsecured loan - but probably not for a loan by an 'investor'. I'm not a lawyer though, so I'm adding to the guesswork.

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By Tax Dragon
08th Nov 2019 06:53

Aweb must have a pretty solid score in the erher, and you must have a pretty good service history with your client, for it to be quicker to do this than transfer the money to X and on from X to the investor.

I'm guessing too that the loan must be more than £10, else your fees will surely exceed any bank charges saved.

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