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Corporate interest restriction ‘devil is in the detail’ – partnership JVs

Corporate interest restriction ‘devil is in the detail'

This week we look at the CIR rules as they apply to JVs structured as partnerships.

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This is the twenty eighth in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation was included in Finance (No.2) Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. We follow up last week’s article on the CIR regime and joint ventures (JVs) structured as companies, with this week’s article looking at JVs that are structured as partnerships. These give rise to different issues from corporate JVs, principally due to partnerships being transparent, rather than opaque, for UK corporation tax purposes.

Consolidated Partnerships

Where a JV is structured as a partnership, and one of the partners fully consolidates the partnership in its financial statements, this may give rise to an inefficient CIR position, insofar as:

  • In relation to amounts taken from the group accounts, the full amount of the partnership’s operating profit and external interest expense will be included in calculating the investor’s group-EBITDA and qualifying net group interest expense (QNGIE) (and hence its group ratio); and
  • Whereas, in relation to the amounts taken from the tax computations, only the investor’s appropriate partnership share of these amounts will be included in calculating its tax-interest and tax-EBITDA.

This may be unfavourable where the partnership has a low interest EBITDA ratio as compared to the wider group.

In such cases, the ‘interest allowance (consolidated partnerships) election’ allows the investor the option to essentially ‘de-consolidate’ the partnership for the purpose of calculating the investor group’s adjusted net group interest expense (ANGIE), QNGIE and group-EBITDA, by ignoring any actual amounts recognised in the investor’s financial statements in respect of the partnership’s income and expenses and instead treating the partnership as accounted for using the equity method (including the share of profits as a single line in the consolidated profit and loss account).

Having done this, the investor may want to go one step further and also make an ‘interest allowance (non-consolidated investment) election’ in order to proportionately consolidate its effective share of the JV’s group-interest and group-EBITDA.

In summary:

  • No election

Investor consolidates 100 percent of the JV’s interest costs and earnings in calculating its group-interest and group-EBITDA;

  • Consolidated partnership election 

Investor de-consolidates its investment and recognises only its net return from the JV in calculating its group-EBITDA; and

  • Consolidated partnership election and Non-consolidated investment election

Investor consolidates its proportionate share of the JV’s interest costs and earnings in calculating its group-interest and group-EBITDA.

Non-Consolidated Partnership JVs

Analysis at JV level

If the JV partnership would not qualify as a ‘consolidated subsidiary’ of any of the investors under IAS, then the JV partnership will not be part of any investor’s CIR group.  Nor (unless the partnership is listed on a recognised stock exchange and is sufficiently widely held) will the partnership itself be capable of being the ultimate parent of its own CIR group. If the partnership held shares in any company, that company would therefore be the ultimate parent of its own CIR group.

Analysis at Corporate Investor level

To the extent the JV partnership is debt-funded by its investors, arm’s length interest costs will typically generate nil net tax-interest income or expense and nil net ANGIE or QNGIE for the investor (provided funding is provided by the investors pro rata to their stake and on equal terms).

To the extent the JV partnership is debt-funded by a third party, this potentially creates the same CIR inefficiency as in the ‘non-consolidated corporate JV’ scenario discussed in the previous article, insofar as none of the interest expense incurred by the JV would be included in calculating the investor’s own ANGIE and QNGIE, whereas its share of any profits of the JV would boost its group-EBITDA (when recognised in PBT in its financial statements). This would have the effect of depressing the investor’s group ratio (as compared to a consolidated subsidiary, whose interest costs and EBITDA would be included).  Again, in such circumstances, the investor might consider making an ‘interest allowance (non-consolidated investment) election’ to address this.

The previous articles in this series can be found here:

For further information please contact:

Rob Norris

Richard Rudman

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