CFM96920 - Interest restriction: joint ventures: qualifying infrastructure company JV: treatment of a single QIC JV company

TIOPA10/S444

The public infrastructure rules set out specific provisions for how certain qualifying infrastructure companies (QICs) are treated under the Corporation Interest Restriction rules. In particular, where the relevant conditions are satisfied and the company so elects, the amounts qualifying tax-interest and tax-EBITDA are excluded from the normal calculations.

A joint venture company (JV) can be a QIC where it meets the conditions in TIOPA10/S433 in the same way as for all other companies. Under these provisions, all third party interest in the JV is excluded from being tax-interest expense by virtue of TIOPA10/s438(3)(a).

Where the investors in the QIC JV are all QICs related party interest paid to those investors is also excluded by virtue of TIOPA10/s438(3)(b) because the investors themselves are QICs.

However, if some of investors are not QICs then this can create a restriction of the related party interest. So while third party interest and interest paid to the QIC investors is excluded from being tax interest expense, interest paid to the non-QIC, related party investors is not excluded from being tax interest expense. Given the tax-EBITDA of the QIC JV is nil then it can be impossible for the JV to get any relief for this related party interest paid to non-QIC investors.

It may not be beneficial for the non-QIC investor to invest in a QIC company as any related party interest from these investors would be all restricted. However, if the non-QIC investors were to insist that the JV became a non-QIC company then the QIC investors would typically lose their QIC status as they would be holding shares in a company that is not a QIC (TIOPA10/s433(5)-(10)). Therefore this could discourage any investment in a joint venture between QIC and non-QIC investors.

The joint venture election under TIOPA10/s444 allows a QIC JV company to retain aspects of its QIC status in relation to the interests held by QIC investors but also ensure that it is not disadvantaged by non-QIC investors. There is no prescribed form for the election. If the group has a Customer Compliance Manager (CCM), elections can be sent to them, otherwise see the CIR internet page for where to send elections.

The requirements for a joint venture election

A joint venture election can be made in the following circumstances:-

  • The JV company must have at least one QIC as an investor.
  • The JV company has to be an ultimate parent of a worldwide group at all times in the period of account of the worldwide group.
  • The remaining shares not held by QIC investors are held by investors who are not QICs.
  • If each of the investors must have lent money to the JV company.
  • The amounts that each of the investors has lent to the JV company stand in the same or substantially the same proportion as the shares in the JV company that each of them has.
  • At all times in the accounting period, the investors have the same rights in relation to the shares in or assets of the JV company and the same rights in money debts or debts in question.
  • The joint venture company makes an election so that this section applies for the accounting period.

Effect of the election

Where an election is made for an accounting period during which the JV company is not the ultimate parent of a multi-company group, this has the following effect on the operation of the public infrastructure rules:

TIOPA10/s444(5)-(7) apply to reduce an exempt amount of the joint venture with application to interest expense paid to parties who are not investors in the JV. This would usually cover interest paid to third parties but it could cover interest paid to a related party QIC companies that are not investors in the JV company.

The exempt amount is reduced by reference to the qualifying proportion of the joint venture company. So in the circumstance where the joint venture company has third party interest of 50 with a share of qualifying investors at 60% and non-qualifying investors at 40% then the exempt amount of this third party interest will be 60% of 50 = 30. Any amounts not covered by the exempt amount remain as tax-interest. Therefore the remaining 20 of third party interest becomes tax-interest expense as does any related party interest paid to non-qualifying investors.

TIOPA10/S444(8) applies so that the public infrastructure rules only exclude the qualifying proportion of the tax-interest income of the JV company.

TIOPA10/s444(9) applies so that the JV includes some tax-EBITDA. This tax-EBITDA is based upon the tax-EBITDA of the JV that would be calculated without the chapter 8 provisions. The tax-EBITDA of the JV under the election is the non-qualifying investors’ proportion of the JV of the total tax-EBITDA of the JV.

So for example consider the position where, without applying the public infrastructure rules, the tax-EBITDA of the JV is 100. If the non-qualifying investors’ proportion of the JV is 40% then the tax-EBITDA will be 40.

TIOPA10/s444(10) acts in a similar way to TIOPA10/S444(9) for group-EBITDA. This section allows the group that contains the JV company to have an amount of group-EBITDA from the JV in proportion of the non-qualifying investors’ share of the joint venture to the group-EBITDA that the joint venture would have if the provisions of chapter 8 did not apply. There in an analogous example if the JV company without the provisions of chapter contributed 100 to group-EBITDA and the non-qualifying proportion of the JV company is 40% then the contribution of the JV to group-EBITDA would be reduced to 40.

These rules are modified in respect of JV group where a JV company is the ultimate parent of a multi-company worldwide group.