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.