This week’s article looks at the related parties aspects of the group ratio method provisions.
This is the fourth of our series of articles looking at some of the detail of the new corporate interest restriction rules, which have been removed from Finance Bill 2017 following the announcement of the General Election. Until an announcement is made by Ministers (presumably following the election) we would recommend that groups assume that the rules will apply from 1 April 2017. In last week’s article, we introduced the group ratio method. Under this method, the interest capacity is based, in part, on a group accounts measure of net interest (known as qualifying net group-interest expense). For these purposes, interest like expenses payable to a related party are not included in the qualifying net group-interest expense, thereby reducing the capacity to deduct interest. If the group ratio method is to be used, it will be necessary to self-assess whether the group is paying interest etc. to related parties and, if so, whether any of the exclusions from the related party rules apply.
The general rule is that persons are related parties at a time when any of the following three conditions are satisfied:
The test of whether there is a 25% investment is widely drawn by reference to possession of voting power, entitlement to proceeds on a disposal of equity in the company, and the entitlement of equity holders to income or assets. Rights of connected persons and persons ‘acting together’ are attributed, so certain private equity partnerships may therefore be caught under these rules.
Persons will not be treated as related under the general rule when any of the following conditions are satisfied but only in respect of a specified financial instrument, as follows:
There are three further rules which deem persons to be related parties but only in respect of certain types of funding. These are not subject to the exemptions listed above.
A financial liability (e.g. a loan relationship) is deemed to be made between related parties in any of the following circumstances:
A person is not treated as a related party as a result of a guarantee etc. if any of the following apply:
This is the fourth in our series of articles on the detail of the new corporate interest restriction regime. Our previous articles covered draft guidance and regulations on the regime, the debt cap when applying the fixed ratio method, and elections to adjust the group ratio method calculation.
For further information please contact:
Rob Norris | Rob.firstname.lastname@example.org
Mark Eaton | Mark.Eaton@kpmg.co.uk
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.