CFM96750 - Interest restriction: joint ventures: treatment when no elections apply: example 2: transparent JV

Link to the structure diagram for this example

This example uses the same figures as in example 1. The only difference is that JV is transparent.

Accounts	X plc	JV	X plc Group
Operating profit	100	150	100
3rd party interest expense (QNGIE)	- 50	- 60	- 50
Share of profits of JV	0	-	45
Profit Before Tax	50	90	95

Calculation of Group Ratio	X plc Group
Qualifying net group-interest expense - (A)	50
PBT	95
Add back interest expense	50
Group-EBITDA - (B)	145
Group Ratio ( A/B)	34%

Interest allowance	X plc
Tax-EBITDA	175
X plc group ratio	34%
Interest allowance	60
Net tax -interest expense	80
Less interest allowacnce	- 60
Interest restriction	20

X plc

The accounting is exactly the same as for example so the group ratio remains the same. It is 34%.

However looking at the taxable profits of the X plc group all figures from its share of JV are brought into the X plc’s tax computation. This means that X plc recognises 30 of interest from JV and 75 of operating profits. Therefore X plc has net tax interest of 50 + 30. It also included tax EBITDA of 75 from JV meaning that the tax-EBITDA for the group is 175. This means that there is an interest allowance of 60 which creates an interest restriction of 20.

JV

JV is transparent and is not a taxable entity. Therefore the interest allowance and interest restriction do not apply to JV.