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OECD Corporate Interest Restrictions - As implemented in the United Kingdom

  • United Kingdom
  • Tax planning and consultancy


What are they?

Tax rules being implemented in the UK and other countries following the OECD BEPS project to reduce the scope for shifting profit between countries by the use of significant interest expenses and other finance costs. The rules will have an economic influence on the financing of business (especially real estate) as they provide limits on the extent to which interest expense can be deducted in calculating taxable profits.

Why do they matter?

These rules represent a significant change to the historic treatment of interest costs for tax purposes. They will impact on the taxable profits of companies with total UK group interest and other financial costs of over £2million in a year. They will change the status quo for many companies on the financing of their business and their tax compliance. Some companies may wish to restructure their financing arrangements.

When are they implemented?

Effectively they have already been implemented. They will be enacted (retrospectively) for expenses from 1 April 2017 as part of the Finance (No.2) Bill 2017.

How do they work?

There are two basic rules, the fixed ratio and the group ratio. Also for certain companies – including some property rental businesses – there may be an alternative basis of calculation for public infrastructure.

The fixed ratio gives a restriction of the lower of 30% of EBITDA and net worldwide debt. The group ratio potentially, on an election being made gives a full deduction for all third party interest and other costs, subject again to a cap of the net external interest payable on the world wide debt, but related party debt, which is quite broadly defined, will not be taken into account.

The rules do not currently extend to non-resident landlords, but are expected to be extended also to them in respect of their UK property income.

An Example

A US parent company X Inc finances its UK subsidiary Y Ltd through bonds issued by Y Ltd. (not necessarily to X Inc or any other related party).

In 2018, Y Ltd incurs £4m in interest and other expenses treated as ‘tax-interest’ related to these bonds.

In 2018, Y Ltd has earnings before interest, tax, amortisation and depreciation (EBITDA) as defined for tax purposes (tax-EBITDA) of £10m

Under the basic method (30% of EBITDA) Y Ltd has an interest capacity of £3m and that will be the maximum corporation tax deduction available in 2018 to Y Ltd. The remaining £1m of interest expense may be carried forward and deducted against corporation tax profit in a future year if Y Ltd then has spare interest capacity.

The interest capacity is for all UK group members and is (in the simple case) calculated on the total tax-EBITDA group members. There is time limited provision to carry forward spare interest capacity.

… or using Group ratio rule

Extending the example above, consider the worldwide group consisting of X Inc. and Y Ltd. X Inc. has no net interest costs or interest income. Net group worldwide interest expense is also £4m. X Inc. generates zero net earnings.

If worldwide group EBITDA is still £10m, then, using the worldwide group ratio method, rather than the basic method, the UK group (Y Ltd) now has an interest capacity of £4m and so suffers no interest restriction.

Y Ltd should elect for the use of the group ratio rule in 2018


The example given serves only to illustrate a very simple case and the importance of making the right elections each year.

There are a number of elective options in the new rules which affect the calculation of the maximum interest deduction available to a group or company and both the two main choices shown above are subject to different worldwide interest caps.

There are also some important variations to the rules for particular circumstances, in particular a wide ranging exemption for qualifying infrastructure companies which allows for the high gearing costs common in infrastructure and real estate projects.

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