CFM96950 – Corporate Finance Manual – HMRC Internal Manual

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TIOPA10/445

The basic election of QIC joint venture under TIOPA10/S444 applies when the joint venture is not the ultimate parent of a multi-company group at any time during the accounting period. TIOPA10/s445 modifies the effect of the choice when the JV has a consolidated subsidiary in the period.

Conditions for a TIOPA10 JV group

Where a joint venture is the ultimate parent of a global group at any time during the accounting period, the QIC joint venture has no effect unless:

  • All companies in the global JV group are eligible infrastructure companies.
  • The ultimate parent company of the global JV group holds 100% of the entities throughout the period.
  • All companies in the global JV group have the same accounting periods.

Modifications for a JV group

QIC Joint Venture Election Conditions

Note that the conditions in TIOPA10/S444 must still be met, subject to the following changes.

For purposes of applying the terms of TIOPA10/s444(1)(c)-(e), loans made by investors to other subsidiaries will be treated as if they were made to the ultimate parent of the JV group ( TIOPA10/S445(3)).

Link to structure diagram for this example

In this example, investors lend to the JV group in proportion to their share in the ultimate parent of the JV group. The four investors can lend to different members of the JV, but as long as the loan is proportional to the ultimate parent’s share of the JV, the condition of TIOPA10/s444(1)(d) is met. This would also be the case if some loans in the example were distributed among the members of the JV group. For example, Investor D might have two separate loans at JV and JV sub 2 which earn interest of 10 and 20 respectively. If everything else remains the same, then TIOPA10/s444(1)(d) would still be respected.

Effect of Election of QIC Joint Venture on JV Group

When the JV company that leads a JV group makes a QIC joint venture election, the effect of the election applies to all members of the JV group (TIOPA10/S445(4)).

Example

Link to structure diagram for this example

Each company in the JV group can be considered for how it is treated under the QIC TIOPA10 joint venture election.

JV parent processing

The parent company of the JV has a third party interest of 30 and an interest paid to non-qualifying investor C of 50. It has a group EBITDA and a tax EBTIDA of 100.

Applying TIOPA10/S444(6) to 30% then 60% interest of 30 is an exempt amount of 18. The remaining 12 are tax interest charges to the parent company of the JV. It is therefore also included both in the adjusted net interest expense of the group and in the adjusted net interest expense of the group.

The 50% interest paid to Investor C cannot be an exempt amount because it is paid to a related party that is not a qualifying infrastructure company. This is in addition to the adjusted group net interest expense, but does not add the qualifying group net interest expense as it is paid to a related party.

Overall, there is a tax interest expense for the parent JV of 50 + 12 = 62.

Applying TIOPA10/s444(9) gives a tax-EBITDA figure for the 40% JV parent company of 200 = 80.

Similarly, applying TIOPA10/s444(10) gives a group EBITDA figure to parent company of 80.

Treatment of JV sub 1

JV sub 1 has a third party interest of 50 and interest paid to qualified investors A and B of 120. It has a tax EBTIDA of 140 before taking into account the effect of the QIC JV election, which is the amount that it contributes to the group-EBITDA of the JV group.

Applying TIOPA10/S444(6) to one-third interest of 50 means there is an exempt amount of 30 (60% of 50). The remaining 20 is the tax interest expense for JV sub 1. It is also the contribution of JV Sub 1 to both the adjusted net group interest expense and the adjusted net group interest expense of the JV group.

The 120 of the interest paid to Investors A and B is an exempt amount because it is paid to a related party that is a qualifying infrastructure corporation. This is therefore excluded from the adjusted group net interest expense and the eligible group net interest expense of the JV group.

Overall, there is a tax interest charge of 20 which is not an exempt amount.

The application of TIOPA10/s444(9) gives a tax-EBITDA figure for JV sub 1 of 40% of 140 = 56.

Similarly, the application of TIOPPA 2010/s444(10) means that the JV sub 1 contributes 56% to the EBITDA of the JV Group.

Treatment of JV sub 2

JV sub 2 has no third party interest and interest paid to non-qualifying investor D of 30. It has a tax EBTIDA of 60 before taking into account the effect of the election of QIC JV.

The 30 of the interest paid to Investor C is not an exempt amount because it is paid to a related party that is a non-qualifying infrastructure corporation.

This interest expense is therefore included in the adjusted group net interest expense for the JV group. However, it cannot be included in the group’s net interest expense because it is paid to a related party.

Overall, there is a tax interest charge of 30 which is not an exempt amount.

Applying TIOPA10/s444(9) gives a tax-EBITDA figure for JV sub 2 of 40% of 100 = 40.

Similarly, the application of TIOPPA 2010/s444(10) means that the JV sub 2 contributes 40 to the group EBITDA for the JV group.

Apply the rules

Tax interest charges Tax-EBITDA
joint venture parent 62 80
JV under 1 20 56
JV under 2 30 40
Total 112 176

Applying the fixed ratio rule to the JV group gives an interest capacity allocation of 30% x 176 = 53. So there would be an interest restriction of 59.

Group numbers are calculated as follows (prior to any new elections):

Contribution to ANGIE QNGIE membership fee Contribution to Group EBITDA
joint venture parent 62 12 80
JV under 1 20 20 56
JV under 2 30 40
Total 112 32 176

The adjusted group net interest expense (ANGIE) for the JV group is 112, and therefore the fixed ratio debt ceiling does not limit the fixed ratio rule.

JV Group has a group ratio of 32/176 = 18.2%. This will not increase the interest deduction beyond the fixed ratio rule.

It may be advantageous in this situation to make a mixed choice according to the group ratio if the ineligible investors have high group ratios themselves.

In the previous example, if JV sub 2 made a loan to eligible investor A, which meant that eligible investor A paid interest of 50 to JV sub 2, the interest of 50 paid by investor A would not would not be considered an exempt amount. This is due to the fact:

JV made a TIOPA10/s444 election.

JV sub 2 is a member of the global JV group and is a creditor for purposes of TIOPA10/s438 of Investor A.

Investor A is not a member of the global group JV, is not a third party of the global group JV and is a qualifying infrastructure company.

This treatment would not only apply to qualified investors of the JV, but also to other related parties of the JV group that are not members of the JV group.

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