Source: Reed Smith (Worldwide) via Mondaq, 29 March 2017
“This Reed Smith briefing provides a high-level summary of the new rules limiting the UK tax deductibility of corporate interest expenses.
The new rules apply from 1 April 2017 to interest payments made from that date under new and existing loans: no grandfathering is available for existing loans.
Previously, the tax deductibility of corporate interest expenses broadly depended on the amount of interest which would have been lent by a third party in the same circumstances (without any related party support, such as a parent guarantee). The new rules operate after the application of this arm’s length test, so that they potentially restrict the tax relief on interest which passes that test – even interest on third party debt.
Under the new rules, the starting point is that tax relief for interest is limited to net tax-interest expenses of up to 30 per cent of a group’s UK tax-EBITDA for the relevant period or, if lower, the adjusted net interest expenses of the worldwide group (ANGIE) for that period. Certain loan relationship and derivative contract debits and credits are included in calculating net tax-interest expenses, and the tax-EBITDA of a company means its corporation tax profits or losses after making certain adjustments.”