Blackrock Holdco – UK Upper Tribunal completely denies interest deductions under the UK transfer pricing rules because the loan was made without group support covenants

The structure for the acquisition by the BlackRock group of the target (“BGI”) entailed a BlackRock LLC (“LLC4”) lending US$4 billion to a wholly-owned LLC (“LLC5”) as well as injecting substantial equity into LLC5, with LLC5 using most of those proceeds to subscribe for preferred shares of the transaction Buyco (“LLC6” – which acquired all the shares of BGI). LLC6 was wholly-owned by LLC5 save for the common shares held directly by LLC4.

The UK transfer-pricing legislation (which was explicitly stipulated “to be read in such manner as best secures consistency” with the OECD’s Transfer Pricing Guidelines) required that the profits and loss of LLC5 be computed as if the transaction which would have been made between two independent enterprises (the “arm’s length provision”) had been made, instead of the “actual provision” between LLC5 and LLC4. After noting that, like Art. 9 of the OECD Model Convention, such legislation focused on the “two” enterprises to the transaction, rather than third parties, the Tribunal stated:

[T]he main concern of an independent lender of $4 billion to a company like LLC5 would be the risks around the fact that the borrower in the position of LLC5 had no control over the dividend flow to it and so its ability to repay the loan. In the actual transaction, LLC4 through its ownership of the LLC6 Common Shares, controlled LLC6 and so the dividend flow to LLC5. LLC4 did not therefore need covenants from LLC6 or BGI. In the hypothetical transaction however, the dividend flow would need to be secured so far as possible … .

In confirming the denial by HMRC of all of LLC5’s interest deductions on the basis that the loan transaction between the two enterprises (LLC4 and LLC5) was not one which would have been made by arm’s-length enterprises (i.e., it lacked covenants of LLC5 and BGI to ensure the flow of dividends from LLC5 to service the loan), the Tribunal stated:

Third-party covenants that were not given as part of or in support of the actual transaction cannot be considered to be part of the hypothetical transaction as this materially changes the surrounding circumstances and alters the economically relevant characteristics of the transactions in question. …

[A]n independent lender would not have made a $4 billion loan to LLC5 without such covenants being in place and that important finding should itself have determined that there was no comparable arm’s length transaction.

The “two enterprise” problem in this case, resulting in a complete interest denial, might not arise under ITA s. 247(2), which references the terms or conditions “between any of the participants” in the transaction or series.

Neal Armstrong. Summary of Revenue and Customs v Blackrock Holdco 5 LLC, [2022] UKUT 199 (TCC) under s. 247(2)(d).