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Global Tax Digest - Corporate Interest Restrictions

  • United Kingdom
  • Tax planning and consultancy

16-03-2017

As part of the OECD Base Erosion and Profit Shifting(BEPS) project, the UK Government is proposing legislation to restrict the ability of companies to deduct interest costs. The draft legislation(which is due to come into effect retrospectively on April 1, 2017 and remain in effect until its likely final enactment in about July) aims to limit tax base erosion involving interest deductions and other financial payments. Essentially, it does this by providing a ceiling on the amount of interest (and economically similar)payments that can be deducted in a company’s computation of its profit for corporation tax purposes. The ceiling is on a group basis (not company by company) and is related to the group profit before interest, tax and certain other deductions.

Existing rules such as transfer pricing and thin capitalization will continue to apply and the BEPS restriction will be applied, if at all, to the otherwise allowable payments.

Broadly speaking (and subject to a minimum allowance of £2million), the rules will limit deductions in the UK for the relevant interest and other expenses to 30% of the UK group companies earnings (profit) before interest, tax, depreciation and amortization are deducted (EBITDA) and capped to the total net interest and other relevant expenses of the worldwide group, if that is less. Alternatively, if that can give a better result, to the same percentage of EBITDA (up to 100%) as incurred in the worldwide group as a whole, in which case the cap is limited to the net interest and other relevant expenses of the worldwide group, excluding any expenses due to related parties.

There are some exceptions including, most notably, one for companies specializing in public benefit infrastructure that has been widened in the most recent draft to include providing commercial or residential buildings for rental occupation.

The OECD “BEPS Action 4” report on which the legislation is based can be found here.

The UK legislation is currently in draft form and may be subject to changes in its passage through parliament as part of the Finance Bill 2017. Many other OECD member jurisdictions either already have or are planning to enact similar legislation including all other EU member states.

Click here to read the full Global Tax Digest.

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