Two sets of regulations relating to the new corporate interest restriction (CIR) rules have been enacted. One set addresses certain potential transitional mismatches between the way amounts are treated for UK tax purposes and in group accounts on commencement of the new CIR rules. The other set provides for certain consequential amendments to other tax rules in light of the new CIR rules. The two sets of Regulations are substantively the same as the draft versions previously published by the Government for consultation, and both come into force on 29 December 2017, but have effect from 1 April 2017 (the start date of the CIR rules).
The Corporate Interest Restriction (Financial Statements: Group Mismatches) Regulations 2017
These Regulations provide for adjustments to calculations under the CIR rules in three specific cases where the accounts of the worldwide group and the accounts of a company in the group give rise to mismatches on the commencement of the new provisions:
- Loan relationship accounted for at fair value
In certain circumstances where a loan relationship is accounted for at fair value in the worldwide group’s financial statements (or as the hedged item for a fair value hedge), but at amortised cost in the financial statements, amortised cost treatment will be deemed in the group’s financial statements for CIR purposes.
- Debt buy-back
In certain circumstances where a loan relationship exists between two companies in a worldwide group was derecognised prior to the commencement of the new CIR rules when the loan became an intra-group loan, any gain or loss recognised in the financial statements of the worldwide group on derecognition of the loan relationship will be treated as brought into account over the remainder of the term of the loan (thus matching the treatment for UK corporation tax purposes).
- Asset-backed pension contributions
In certain circumstances where a group has implemented an asset-backed pension contribution arrangement under which a group company obtains corporation tax relief for a finance charge, the finance charge will be deemed to be recognised in the group’s financial statements (thus ensuring no mismatch with the UK tax treatment).
The first two categories are transitional rules which only apply where conditions are satisfied on 1 April 2017. The third category applies more generally.
The Corporate Interest Restriction (Consequential Amendments) Regulations 2017
These Regulations make the following consequential amendments in connection with the CIR rules.
- Authorised investment funds
The Authorised Investment Funds (Tax) Regulations 2006 are amended so that interest distributions, PAIF distributions (interest) and TEF distributions (non-dividend) paid by authorised investment funds are treated as not being a tax-interest expense amount for the purposes of the CIR rules.
- Securitisation companies
The special rules for companies within the permanent securitisation regime (in The Taxation of Insurance Securitisation Companies Regulations 2007) are amended so that for CIR purposes: (i) the net tax-interest income of a securitisation company is equal to the retained profit amount of the company and any management fee paid to another UK group company; (ii) any such management fee is treated as a negative amount of adjusted corporation tax earnings; and (iii) the rule preventing interest on results dependent securities from counting towards a group’s qualifying net group-interest expense is disapplied in relation to any interest paid or other distribution made by a securitisation company. (An equivalent change to point (iii) is also made to the Taxation of Insurance Securitisation Companies Regulations 2007.)
- Investment trusts
The Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations 2009 are amended so that interest distributions paid by an investment trust are treated as not being a tax-interest expense amount for CIR purposes.
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