A high-profile Canadian tax case has brought to the fore useful theories and practical techniques for determining interest charges and guarantee fees between related parties. The UK legislation and guidance on these issues is potentially contradictory and differs as between subsidiaries and branches. However, certain principles are clear in the UK context: in general, subsidiaries should be charged interest rates and guarantee fees that reflect their standalone creditworthiness; however, recognition should normally be given to the implicit guarantee of financial support from the parent or wider group to which a company belongs; branches should generally be charged the same interest rate as the head office.
