CFM96790 - Interest restriction: joint ventures: interest allowance (non-consolidated investment) election: example 2: opaque JV with loan from the principal worldwide group
Here the amounts are the same as the previous example at CFM96780, but X plc has taken out additional third party interest which it has on-lent to the JV.
In this situation TIOPA10/s427(3)(a) and TIOPA10/s428(5) apply to the loan from X plc to the JV. »Ê¹ÚÌåÓýapprefore the election effectively ignores these amounts featuring in the financial statements of the principal worldwide group and the associated worldwide group. »Ê¹ÚÌåÓýappse amounts do not form part of adjusted net group-interest expense in either the principal worldwide group or the associated worldwide group.
»Ê¹ÚÌåÓýapp net effect of this is to ignore the 30 of adjusted net group-interest expense of the JV and to ignore the 30 of corresponding interest income in the calculation of adjusted net group-interest expense in X plc. This means that X plc has 80 of adjusted net group-interest expense and similarly for qualifying net group-interest expense because none of this is offset by any interest income from the JV.
| Accounts | X plc | JV | X plc group |
|---|---|---|---|
| Operating profit | 100 | 150 | 100 |
| 3rd party interest (expense) | - 80 | - 60 | - 80 |
| Related party interest (expense)/income | 30 | - 30 | 30 |
| Share of profits of JV | - | - | 30 |
| Profit before tax | 50 | 60 | 80 |
| Profit before tax ( ignoring loan) | - | 90 | - |
| Share of profits of JV (ignoring loan) | - | - | 45 |
- X plc group share of profits from JV - 50%
| Calculation of QNGIE | X plc Group |
|---|---|
| QNGIE in X plc | 80 |
| Share of JV QNGIE | 30 |
| Total QNGIE - (A) | 110 |
| Calculation of group - EBITDA | X plc Group |
|---|---|
| PBT of X plc group (pre-election) | 80 |
| Remove interest on loan to JV | - 30 |
| Remove share of JV’s profits | - 30 |
| PBT of X plc group after adjustments | 20 |
| Addback NGIE (excluding loan to JV)) | 80 |
| Group-EBITDA of X plc group (before share of JV (before share of JV group-EBITDA) | 100 |
| Share of JV’s group-EBITDA | 75 |
| Group-EBITDA - (B) | 175 |
- Group ratio - (A/B) - 63%
| Interest allocances | X plc |
|---|---|
| Tax-EBITDA | 100 |
| X plc group ratio | 63% |
| Interest allowance | 63 |
X plc has a net tax-interest expense of 50 (tax-interest expense of 80 less tax interest income of 30). All of its third party interest of 80 is qualifying net group-interest expense to use in its group ratio. »Ê¹ÚÌåÓýapp group interest income from JV is ignored for the purposes of TIOPA10/S427. It obtains a further qualifying net group-interest expense of 30 by its share in the third party interest of the JV. »Ê¹ÚÌåÓýapp group ratio is 63% and as there is an interest allowance of 63 there is no restriction of the net tax-interest expense in X plc.