CFM96730 - Interest restriction: joint ventures: treatment when no elections apply: group ratio and group interest

Investor Group

Where a worldwide group has an interest in non-group entities the results of the entity will not be consolidated, on a line-by-line basis, in the group’s financial statements. As a result, any amounts of interest and other financing costs incurred by the non-group entity will not ordinarily be included within group-interest.

The results of the non-group entity will be included into the group’s financial statement as follows:

  • The group’s share of the results of JVs and associates.
  • The fair value movements of the group’s investment in subsidiaries held at fair value.

These amounts will be recognised as items of profit or loss in the group’s financial statements. They will therefore be included in the group-EBITDA of the group.

Therefore, in comparison to a group entity, any interest incurred by the non-group entity will not be recognised as contributing to the net group-interest expense of the worldwide group. However any interest incurred by the group entity will be included in the group’s net group-interest expense.

As a result, in comparison with an investment in a group entity, this will supress the group ratio of the worldwide group. The non-group entity will not increase the net group interest expense of the worldwide group but if the non-group entity is profitable then this will increase group-EBITDA.

The interest allowance (non-consolidated investment) election provides flexibility around this treatment.

Investee Group

Opaque entities

Where the non-group entity is a corporate body it is an opaque entity and will be taxed at the entity level and not taxed in the worldwide group. In some circumstances the entity may have a relatively low group ratio to that of its investors. The entity does have the opportunity to obtain a similar group ratio to that of its investors by using the Group Ratio (Blended) Rule.

Transparent Entities

Where the non-group entity is a transparent entity the taxable profits of the entity that belong to the worldwide group will be taxed in the worldwide group.