Intragroup Financial Transactions Under Increasing Scrutiny by Tax Authorities: A European Perspective. Part III United Kingdom: The “Unallowable Purpose” Doctrine In the United Kingdom, HM Revenue and Customs (HMRC) has adopted a doctrinal approach centered on the concept of “unallowable purpose”, which plays a critical role in the application of interest deductibility rules. This concept is codified under Part 6A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) and applies notably within the framework of the Corporate Interest Restriction (CIR) and the General Anti-Abuse Rule (GAAR). According to this doctrine, interest expenses arising from intragroup financing arrangements may be non-deductible for tax purposes if one of the main purposes of the transaction is to obtain a tax advantage that would not otherwise be available. As specified in TIOPA 2010, Schedule 7A, Paragraph 11, HMRC examines whether the transaction is driven by a legitimate commercial purpose, whether the borrower has actual financial capacity, whether the loan amount is proportional to business needs, and whether—under arm’s length conditions—the transaction would more appropriately have taken the form of equity financing. Where these elements are lacking, and particularly where the transaction lacks economic or financial substance, HMRC may disallow the interest deduction and, where applicable, impose transfer pricing adjustments or penalties. This approach is consistent with the OECD’s BEPS Action 4, which seeks to curb base erosion through excessive interest deductions and other financial payments. To take away Across these jurisdictions, tax authorities are increasingly moving beyond formalistic assessments to adopt a more substantive and principle-based approach to intragroup financial transactions. Taxpayers are now expected to demonstrate not only that interest rates are within market ranges, but also that the financing arrangements are economically justified, commercially necessary, and functionally aligned with the roles and risks of the entities involved. This shift reflects a broader move toward substance-over-form reasoning, proportionality, and alignment with the arm’s length principle, all of which are reshaping financial structuring practices within multinational enterprises. With this Part III, we conclude our series of posts on Financial Transactions in Europe. 🌍 PKF Transfer Pricing is a leading global provider of transfer pricing services, including advisory, documentation, and controversy support. If you would like to learn more about our services, feel free to send us a message.