Chapter INTM521040
Published date | 09 April 2016 |
Record Number | INTM521040 |
An advance thin capitalisation agreement is very likely to include a clause indicating that one of the consequences of breaching the financial conditions may be a disallowance of interest for tax purposes. Unless agreed otherwise, the disallowance will occur in the year of the breach.
Consider, for example, the situation in which the agreement includes a covenant limiting debt:EBITDA to a (purely illustrative) ratio of 8:1, but for some reason the debt component turns out to be greater than the agreement allows, resulting in an actual debt:EBITDA ratio of 10:1. If a decision is made to treat some of the debt (2 out of the 10) as non-arm’s length and the interest on that amount is disallowed, this can be sufficient to reflect what would have happened at 8:1, it achieves the effect of restoring the agreed ratio. The tax disallowance in the year will be the amount of interest on...
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