IFM40690 - Other tax issues: corporation interest restriction: consolidation of QAHC stacks

FA22/SCH2/PARA43

PARA 43 ensures that where there is a stack of qualifying asset holding companies (QAHC), each QAHC will be included in the same worldwide group for the purposes of the CIR rules at TIOPA10/PT10.

Although the accounting treatment might already result in this, it is also possible that each QAHC will form their own worldwide group if they are each non-consolidated subsidiaries per TIOPA10/S475. This could cause difficulties, for example, if the top QAHC borrows and incurs interest expense, feeds the loan down the stack as equity, and the bottom QAHC is the company that receives the interest income. Under the CIR rules, the interest expense and interest income should net off. However, if the QAHCs are in separate CIR worldwide groups, this netting off could not happen.

There are two steps to applying PARA 43. The first step (PARA 43(1) and (2)) identifies the top two QAHCs in the stack while the second step (PARA 43(3) and (4)) adds on successive QAHCs until the entire stack is included.

The first step works by identifying a parent QAHC (‘P’) which, absent PARA 43, would not be in a multi-company worldwide group. P must also not be a wholly owned subsidiary of another QAHC (or is such a subsidiary but is held as a market value investment). P will be the top QAHC in the stack. P can form a worldwide group with its wholly owned subsidiary (‘W’) provided W is a QAHC and is not held by P as a market value investment.

The second step works by identifying a QAHC (‘M’) which is a member of a worldwide group (‘G’). If M has a wholly owned QAHC subsidiary (‘N’) which it does not hold as a market value investment then N becomes a member of G, if it would not otherwise be treated as such.

Example

A QAHC stack comprises of three QAHCs (X Ltd at the top, next Y Ltd, then Z Ltd at the bottom). Each QAHC makes up their own worldwide group under the general rules in TIOPA10/PT10.

Provided all relevant conditions are met, X Ltd will be P under the first step and Y Ltd will be W.

X Ltd and Y Ltd will therefore form a worldwide group.

For the second step, Y Ltd will be M and Z Ltd will be N.

Z Ltd therefore joins the same worldwide group as Y Ltd.

Applying both steps therefore result in all three QAHCs being in the same worldwide group for CIR purposes.