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BEPS action plan 4 "Limiting Base Erosion Involving Intertest Deductions and Other Financial Payments" proposed a fixed ratio rule with a range of acceptable thresholds for countries to adopt of restricting interest deductibility to between 10 and 30% of EBITDA. The objective of the Action Plan is to
restrict the ability to allocate interest deductions to higher tax jurisdictions.
As has been previously announced (and covered extentisively in our newsletters, in the UK, the Finance Act 2017 will introduce a “fixed ratio rule” set at the upper limit of 30% in BEPS 4. This will apply to UK companies and groups within the charge to UK corporation tax, although there is also a separate proposal to bring some non-residents currently within the charge to income tax into corporation tax instead. The 30% of EBITDA cap is subject to a number of exceptions, including importantantly:
a) the new rules do not apply to the first £2m of the group’s interest expense
b) where a worldwide group’s interest ratio exceeds the 30% limit that higher ration can be used instead;
c) an exception for public benefit infrastructure projects, which should cover most real estate investment (discussed further below).
Public infratsructure assets
The BEPS 4 report includes an option to exclude from the rules certain public benefit assets. These are infrastructure assets closely linked to the public sector. The way that the UK has drawn up its rules widens the scope of application. In addition to assets meeting the public benefit test, the UK also exempts buildings (or part of buildings) that are part of a UK property business and are let (or sub-let) on a short term basis to unrelated parties.
Base Erosion and Profit Shifting
UK interest deduction rules
In order to benefit, each company must meet a number of conditions and make an election to be a qualifying infrastructure company (QIC).
In order to be a qualifying infrastructure company a company must meet the following requirements.
a) It must be fully taxed in the UK;
b) all, or all but an insignificant proportion, of its income and assets must be referable to activities in relation to public infrastructure assets (qualifying infrastructure activities); and
c) it must have elected to be a QIC.
Public infrastructure assets fall into two types:
a) tangible assets forming part of the infrastructure of the UK, which meet a public benefit test; and
b) buildings (or part of buildings) that are part of a UK property business and are let (or sub-let) on a short term basis to unrelated parties.
Both types of asset must have, have had, or be likely to have an expected economic life of at least 10 years, and be recognised on the balance sheet of a member of the group of the QIC (which is itself fully taxed in the UK).
We do not provide here further detail on assets falling within a) above although this is available.
As b) is more relevant for the real estate industry, we do provide further detail on the following page.