CFM96740 - Interest restriction: joint ventures: treatment when no elections apply: example 1: opaque JV

Link to the structure diagram for this example

In this example we consider X plc, A worldwide group that has a 50% share of JV.

X plc has operating profits of 100 and pays interest to a third party of 50. JV has operating profits of 150 and pays interest to a third party of 60.

The calculations for the X plc group (the results of X plc with the share of the profits from the JV) and the JV are as follows.

Accounts X plc JV X plc Group
Operating profit 100 150 100
Third party interst expenses (QNGIE) - 50 - 60 - 50
Shares of profits of JV - - 45
Profits Before Tax 50 90 95
Calculation of group ratio X plc Group JV
Qualifying net group-interest expenses - (A) 50 60
PBT 95 90
Add back interes expense 50 60
Group - EBITDA - ( B) 145 150
Group ratio - ( A/B) 34% 40%
Calculation of corporate interest restriction X plc JV
Tax - EBITDA 100 150
Group ratio 34% 40%
Interest allowance 34 60
Net tax interest expense 50 60
Less interest allowance - 34 - 60
Interest restriction 16 0

X plc

The X plc group has a qualifying net group-interest expense of 50. Its group-EBITDA is the group-EBITDA of X plc which is 100 and add to this the share of the profits of the JV which will feature in the consolidated accounts of X plc. This is 45 making the total Group EBITDA of 145. From this the group ratio of 34% is calculated.

Calculating the interest allowance this group ratio is applied to the tax-EBITDA of the X plc group. Tax-EBITDA is 100 because the 45 of profits from the JV is not taxed in X plc and the JV is not part of the group. This gives interest allowance of 34. The net tax-interest expense is assumed to be the same as the group-interest figure of 50 meaning that there is an interest restriction of 16.

JV

JV has qualifying net group interest expense of 60. Its group-EBITDA is 150. This creates a group ratio of 40%.

Calculating the interest capacity allows this 40% to be calculated against the tax-EBITDA. In this case the tax-EBITDA is assumed to be the same as the group-EBITDA and the net tax-interest expense is assumed to be the same as the qualifying net group interest expense of 60. This means that the interest allowance is 60 and, therefore, no interest restriction is applied to the JV. This is because the group ratio in the JV follows the interest profile of the JV.