An investigation by research group Corporate Watch into the accounts of all 19 water companies in England and Wales has found that a third are using overseas loans as way of reducing their tax liabilities.

Corporate Watch says six water companies have avoided paying millions in tax by routing profits through tax havens, using a legal loophole which the government recently chose not to close. They are artificially adding to their debts by taking high interest loans from their owners through the Channel Islands stock exchange.

The companies are borrowing from subsidiaries of their owners based overseas. They can receive the interest payments tax-free because they have issued the loans through the Channel Islands stock exchange as 'quoted Eurobonds'.

Northumbrian, Yorkshire, Anglian, Thames, South Staffordshire and Sutton and East Surrey Water all borrowed from subsidiaries of their owners based overseas, according to the research, and the total borrowing amounts to some £3.4bn.

Usually, when a UK company pays interest to a non-UK company, it has to 'withhold' 20% of the payments and give it to the UK tax authorities. But if the loans are issued as quoted Eurobonds on a 'recognised' stock exchange, such as the Channel Islands' or the Cayman Islands', they benefit from an exemption that means no withholding tax is taken off.

The research company noted that Northumbrian Water was the 'most brazen' case, paying 11% on just over £1bn of loans from its owners, the Hong Kong-based Cheung Kong group run by Li Ka-Shing, the world's ninth-richest person.

Over the next full tax year, more than £100m will be deducted from Northumbrian's profits just from the shareholder loans, potentially avoiding around £24m in UK corporation tax, the research group said.

Corporate Watch's research calculates that the Yorkshire Water group, which is owned by investment funds based in the US, UK and Singapore, and HSBC bank, accrued £66m in interest payments on £844m of quoted Eurobonds in 2012. This, together with the interest payments on its other debt, helped it pay just £100,000 in corporation tax on an operating profit of £335m in 2012, the research company says.

None of the water companies quoted in Corporate Watch's report replied to queries about their use of overseas loans. Industry regulator Ofwat said it 'does not have the power to prevent any change of ownership. However, following a change of ownership we consult on the ability of new owners to be the fit and proper owners of a regulated water company. We have made a number of amendments to the regulatory ringfence conditions in companies' licences to ensure we regulate companies within larger groups effectively and provide reassurance that the companies remain able to finance their regulated activities.'