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.