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HMRC internal manual

Corporate Finance Manual

Interest restriction: joint ventures: qualifying infrastructure company JV: application to JV group with QIC subsidiaries

TIOPA10/445

The basic QIC joint venture election under TIOPA10/S444 operates where the JV is not the ultimate parent of a multi-company group at any point in the accounting period.  TIOPA10/s445 modifies the effect of the election where the JV holds a consolidated subsidiary in the period.

Conditions for a JV group TIOPA10

Where a JV company is the ultimate parent of a worldwide group at any point in the accounting period, the QIC joint venture has no effect unless:

  • All companies within the JV worldwide group are qualifying infrastructure companies.
  • The ultimate parent of the JV worldwide group wholly owns the entities throughout the period.
  • All companies in the JV worldwide group have the same accounting periods.

Modifications for a JV group

Conditions for the QIC joint venture election

Note that the conditions in TIOPA10/S444 still need to be satisfied, subject to the following modifications.

For the purposes of applying the conditions under TIOPA10/s444(1)(c)-(e) loans made by investors to the other subsidiaries will be treated as if they were made to the ultimate parent of the JV group (TIOPA10/S445(3)).

[## TIOPA10/445

The basic QIC joint venture election under TIOPA10/S444 operates where the JV is not the ultimate parent of a multi-company group at any point in the accounting period.  TIOPA10/s445 modifies the effect of the election where the JV holds a consolidated subsidiary in the period.

Conditions for a JV group TIOPA10

Where a JV company is the ultimate parent of a worldwide group at any point in the accounting period, the QIC joint venture has no effect unless:

  • All companies within the JV worldwide group are qualifying infrastructure companies.
  • The ultimate parent of the JV worldwide group wholly owns the entities throughout the period.
  • All companies in the JV worldwide group have the same accounting periods.

Modifications for a JV group

Conditions for the QIC joint venture election

Note that the conditions in TIOPA10/S444 still need to be satisfied, subject to the following modifications.

For the purposes of applying the conditions under TIOPA10/s444(1)(c)-(e) loans made by investors to the other subsidiaries will be treated as if they were made to the ultimate parent of the JV group (TIOPA10/S445(3)).

](http://www.hmrc.gov.uk/gds/cfm/images/CFM96950(1).jpg)

In this example the investors lend to the JV group in proportion to their share of the ultimate parent of the JV group. All four investors can lend to different members of JV but as long as the lending is proportionate with the share of the ultimate parent of the JV the condition of TIOPA10/s444(1)(d) is fulfilled. This would also be the case if some loans in the example are split between members of the JV group. For example investor D could have two separate loans to JV and JV sub 2 which return interest of 10 and 20 respectively. If everything else remains the same then TIOPA10/s444(1)(d) would still be fulfilled.

Effect of the QIC joint venture election on the JV Group

Where the JV company which heads a JV group makes an QIC joint venture election then the effect of the election applies to all members of the JV group (TIOPA10/S445(4)).

Example

[## TIOPA10/445

The basic QIC joint venture election under TIOPA10/S444 operates where the JV is not the ultimate parent of a multi-company group at any point in the accounting period.  TIOPA10/s445 modifies the effect of the election where the JV holds a consolidated subsidiary in the period.

Conditions for a JV group TIOPA10

Where a JV company is the ultimate parent of a worldwide group at any point in the accounting period, the QIC joint venture has no effect unless:

  • All companies within the JV worldwide group are qualifying infrastructure companies.
  • The ultimate parent of the JV worldwide group wholly owns the entities throughout the period.
  • All companies in the JV worldwide group have the same accounting periods.

Modifications for a JV group

Conditions for the QIC joint venture election

Note that the conditions in TIOPA10/S444 still need to be satisfied, subject to the following modifications.

For the purposes of applying the conditions under TIOPA10/s444(1)(c)-(e) loans made by investors to the other subsidiaries will be treated as if they were made to the ultimate parent of the JV group (TIOPA10/S445(3)).

[## TIOPA10/445

The basic QIC joint venture election under TIOPA10/S444 operates where the JV is not the ultimate parent of a multi-company group at any point in the accounting period.  TIOPA10/s445 modifies the effect of the election where the JV holds a consolidated subsidiary in the period.

Conditions for a JV group TIOPA10

Where a JV company is the ultimate parent of a worldwide group at any point in the accounting period, the QIC joint venture has no effect unless:

  • All companies within the JV worldwide group are qualifying infrastructure companies.
  • The ultimate parent of the JV worldwide group wholly owns the entities throughout the period.
  • All companies in the JV worldwide group have the same accounting periods.

Modifications for a JV group

Conditions for the QIC joint venture election

Note that the conditions in TIOPA10/S444 still need to be satisfied, subject to the following modifications.

For the purposes of applying the conditions under TIOPA10/s444(1)(c)-(e) loans made by investors to the other subsidiaries will be treated as if they were made to the ultimate parent of the JV group (TIOPA10/S445(3)).

](http://www.hmrc.gov.uk/gds/cfm/images/CFM96950(1).jpg)

In this example the investors lend to the JV group in proportion to their share of the ultimate parent of the JV group. All four investors can lend to different members of JV but as long as the lending is proportionate with the share of the ultimate parent of the JV the condition of TIOPA10/s444(1)(d) is fulfilled. This would also be the case if some loans in the example are split between members of the JV group. For example investor D could have two separate loans to JV and JV sub 2 which return interest of 10 and 20 respectively. If everything else remains the same then TIOPA10/s444(1)(d) would still be fulfilled.

Effect of the QIC joint venture election on the JV Group

Where the JV company which heads a JV group makes an QIC joint venture election then the effect of the election applies to all members of the JV group (TIOPA10/S445(4)).

Example

](http://www.hmrc.gov.uk/gds/cfm/images/CFM96950(2).jpg)

Each company in the JV group can be considered for how it is treated under the QIC joint venture election TIOPA10.

Treatment of JV parent

JV parent has third party interest of 30 and interest paid to the non-qualifying investor C of 50. It has a group-EBITDA and tax-EBTIDA of 100.

Applying TIOPA10/S444(6) to the third party interest of 30 then 60% of 30 is an exempt amount of 18. The remaining 12 is tax-interest expense for the JV parent.  It therefore is also included in both adjusted net group-interest expense and adjusted net group-interest expense.

The 50 of interest paid to investor C cannot be an exempt amount because it is paid to a related party that is not a qualifying infrastructure company. This adds to the adjusted net group-interest expense but does not add the qualifying net group-interest expense as it is paid to a related party.

Overall there is a tax-interest expense for the JV parent of 50 + 12 = 62.

Applying TIOPA10/s444(9) gives a tax-EBITDA figure for the JV parent of 40% of 200 = 80.

In a similar way applying TIOPA10/s444(10) gives a group-EBITDA figure in respect of the JV parent of 80.

Treatment of JV sub 1

JV sub 1 has third party interest of 50 and interest paid to the qualifying investors A and B of 120.  It has a tax-EBTIDA of 140 before considering the effect of the QIC JV election, which is the amount it contributes to the group-EBITDA of the JV group.

Applying TIOPA10/S444(6) to the third party interest of 50 means that there is an exempt amount of 30 (60% of 50). The remaining 20 is tax-interest expense for JV sub 1.  It is also the contribution of JV Sub 1 to both adjusted net group-interest expense and adjusted net group-interest expense of the JV Group.

The 120 of interest paid to investors A and B is an exempt amount because it is paid to a related party that is a qualifying infrastructure company. This is therefore excluded from the adjusted net group-interest expense and qualifying net group-interest expense of the JV group.

Overall there is a tax-interest expense of 20 that is not an exempt amount.

Applying TIOPA10/s444(9) gives a tax-EBITDA figure for JV sub 1 of 40% of 140 = 56.

In a similar way applying TIOPPA 2010/s444(10) means that the JV sub 1 contributes 56 towards the group-EBITDA for the JV Group.

Treatment of JV sub 2

JV sub 2 has no third party interest and interest paid to the non-qualifying investor D of 30. It has tax-EBTIDA of 60 before considering the effect of the QIC JV election.

The 30 of interest paid to investor C is not an exempt amount because it is paid to a related party that is a non-qualifying infrastructure company.

This 30 of interest is therefore included as part adjusted net group-interest expense for the JV Group.  However, it cannot be included in qualifying net group-interest expense as it is paid to a related party.

Overall there is a tax-interest expense of 30 that is not an exempt amount.

Applying TIOPA10/s444(9) gives a tax-EBITDA figure for JV sub 2 of 40% of 100 = 40.

In a similar way applying TIOPPA 2010/s444(10) means that the JV sub 2 contributes 40 to the group-EBITDA for the JV Group.

Applying the rules

  Tax-interest expense Tax-EBITDA
     
JV parent 62 80
JV sub 1 20 56
JV sub 2 30 40
Total 112 176

Applying the fixed ratio rule to the JV group gives an interest capacity allowance of 30% x 176 = 53.  Therefore there is would be an interest restriction of 59.  

The group figures are calculated as follows (before any further elections):

  Contribution to:    
       
  ANGIE QNGIE Group-EBITDA
JV parent 62 12 80
JV sub 1 20 20 56
JV sub 2 30 - 40
Total 112 32 176

The adjusted net group-interest expense (ANGIE) for the JV Group is 112, and so the fixed ratio debt cap does not limit the fixed ratio rule.

JV Group has a group ratio of 32/176= 18.2%. This will not increase the interest allowance above the fixed ratio rule. 

It may be advantageous in this situation to make a group ratio blended election if the non-qualifying investors have high group ratios themselves.

In the previous example if JV sub 2 made a loan to qualifying investor A which meant that qualifying investor A paid out interest of 50 to JV sub 2 the interest of 50 paid by investor A would not be considered to be an exempt amount. This is because:

JV has made a TIOPA10/s444 election.

JV sub 2 is a member of the JV worldwide group and is a creditor for the purposes of TIOPA10/s438 to Investor A.

Investor A is not a member of the JV worldwide group, it is not a third party to the JV worldwide group and it is a qualifying infrastructure company.

This treatment would not only apply to qualifying investors in the JV but to other related parties of the JV group that are not members of the JV group.