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RF 12H: Meaning of related-party debt
or “What counts as a loan between connected parties for tax purposes”
You could also call this:

“How related-party debt is defined using indirect lending and non-resident ownership”

This section explains some important concepts used in defining related-party debt. You need to know about these when dealing with general collection rules in the Income Tax Act 2007.

When someone talks about indirect associated funding arrangements, they mean a situation where a non-resident person (called the indirect lender) gives money to another person (called the direct lender). The direct lender then gives this money to a third person (called the borrower). This happens so that the borrower can get the money or to pay back the direct lender. The idea is that the borrower ends up owing money, but the indirect lender doesn’t get any passive income from the borrower. For this to be an indirect associated funding arrangement, the indirect lender must be associated with the borrower, and the funding must not meet certain requirements in section RF 12H(1)(a)(i) and (iii).

The section also talks about non-resident owning bodies. These are treated as if they’re associated with a borrower when the members of the non-resident owning body own 50% or more of the borrower. This ownership is defined in a specific way in the law.

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Next up: RF 12J: Treatment of certain payments made under indirect associated funding arrangements

or “How tax applies to payments in complex lending arrangements”
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Part R General collection rules
Withholding tax on non-resident passive income (NRWT)

RF 12IConcepts used for definition of related-party debt

  1. This section applies for the purposes of section RF 12H to describe what is meant by indirect associated funding arrangements and funding through non-resident owning bodies.

  2. An indirect associated funding arrangement exists when—

  3. a non-resident person (the indirect lender) provides funds or pays money, directly or indirectly, to another person (the direct lender) who provides funds to a third person (the borrower)—
    1. in order for the funds to be provided to the borrower, or to reimburse the direct lender or compensate them, for providing the funds to the borrower; and
      1. with the purpose or effect that the borrower incurs financial arrangement expenditure and the indirect lender does not derive non-resident passive income from the borrower; and
      2. the indirect lender is associated with the borrower; and
        1. the funding does not meet the requirements of section RF 12H(1)(a)(i) and (iii) for related-party debt.

          1. A non-resident owning body is treated as associated with a borrower when the ownership interest, within the meaning set out in paragraph (a) of the definition of that term, in the borrower of all the members of the non-resident owning body is 50% or more.

          Notes
          • Section RF 12I: inserted, on , by section 279 (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).