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Taxation of loan transfers

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The main assets of banks are debt assets. Banks transfer loans or parts of them on a regular basis, in one of four ways: assignment, novation, sub-participation and risk participation. Each has its own commercial and tax features, and each may involve a related transaction under the loan relationship rules. Care has to be taken to avoid the triggering of a tax grossing-up clause. In assignment and novation, the new lender has a direct creditor/debtor relationship with the borrower. By contrast, a sub-participant advances to the original lender part of the loan they made to the original borrower, in return for that lender’s obligation to pay over a corresponding part of his receipts from the original borrower. In the case of all loan transfers, the commercial transaction may produce unanticipated tax results, which accordingly need to be factored in.

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