CFM96830 - Interest restriction: joint ventures: interest allowance (consolidated partnerships) election: effect of the election

TIOPA10/S430

Background

A worldwide group can include a partnership as a member if the partnership is controlled by the worldwide group. The partnership consolidates its results in the ultimate parent of the worldwide group. In calculating the group ratio of the worldwide group, the worldwide group can be disadvantaged by consolidating a partnership in certain circumstances.

The group ratio of the worldwide group will include the whole of the results of the JV as it is fully consolidated. This means that the whole of the group-EBITDA of the partnership will be included. However for the purpose of interest restriction the tax-EBITDA is calculated from the share of the partnership. Where the worldwide group is more highly geared than the partnership the difference between group-EBITDA and tax-EBITDA can potentially create an interest restriction that will be greater than the situation where the partnership is not consolidated into the worldwide group.

The election is designed to give a worldwide group the option to treat the partnership as if it was not consolidated for the purposes of calculating the worldwide group’s group ratio. Once an election is made the partnership is treated as if it were a joint venture for the purposes of calculating the group ratio. An investment allowance (non-consolidated investment) election can be used in conjunction with this election.

The effect of the election

Who can elect?

Worldwide groups that can only make an election if both Condition A and Condition B apply:

  • Condition A is that the partnership is fully consolidated into the ultimate parent’s financial statements (s430(5)).
  • Condition B is that the partnership does not have a subsidiary (s430(6)).

What the election does?

The election has two effects:

  • It reverses the effect of consolidating the results of the partnership in the consolidated results of the worldwide group (s320(2)(a)).
  • And it requires the partnership to be accounted for under the equity method of accounting (s330(2)(b)).
  • The result of this is that the partnership is deemed to be an entity that is not consolidated into the accounts of the worldwide group. It is accounted for as if it were a Joint Venture. The worldwide group is still taxed on the basis that the partnership is transparent.

Note that a worldwide group that has made a consolidated partnership election is able to also make an interest allowance (non-consolidated investment) election (s429(3)).