UK Worldwide Debt Cap

Transcription

1 Revised UK Tax Rules on the Deductibility of Interest and other Financing Costs SUMMARY From a date expected sometime in 2009, the UK will be introducing significant additional restrictions on the ability of UK-taxpaying companies to deduct interest in respect of certain borrowings from their affiliates. These new rules are part of the trade-off for the on-going reform of the UK controlled foreign company ( CFC ) rules, as well as the introduction of the proposed UK corporate tax exemption for certain UK and non-uk dividends. This proposed exemption was discussed in an earlier client memorandum dated January 8, It is important to note three things about the proposed restrictions: a) They do not just apply to those UK-taxpaying companies which take advantage of the new exemption for dividends. They can apply to any UK-taxpaying company and they seek to ensure that the cost of leverage borne by UK members of the worldwide group, via intra-group debt, is not excessive relative to the worldwide group s net external leverage (after excluding external borrowings by UK-taxpaying companies). Anyone contemplating a debt-funded acquisition of assets via the UK needs to consider these rules very closely. b) The UK has stopped short of introducing the kind of restrictive interest allocation rules with which US taxpayers will be familiar. However, the changes represent a significant addition to the UK corporation tax compliance burden, made more complex by the need to draft the rules so that fundamental freedoms under EC law are respected. Attempts have been made to limit the impact of these rules on financial institutions but the safe harbours in question are not particularly broad. c) These new rules are in addition to existing restrictions on UK interest deductibility (notably, the UK thin capitalisation rules and the expanded interest anti-abuse rules published in draft in December 2008 and which are discussed in another Sullivan & Cromwell LLP client memorandum). New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 THE COMPANIES TO WHICH THE NEW CAP ON WORLDWIDE INTRA-GROUP FINANCING COSTS IS TO APPLY 1. The new rules apply to any group of entities (not just companies) which is large ; and which contains one or more relevant group companies. That group may or may not comprise exclusively UK entities. Such a group is defined as the worldwide group. A relevant group company is one which is subject to UK corporation tax and which is either the ultimate corporate parent of the worldwide group; or a relevant subsidiary of that ultimate corporate parent. These concepts are discussed further below. The restriction only applies to a company which is either UK-resident or carrying on a UK trade through a permanent establishment. In short, only companies subject to UK corporation tax are subject to the restriction. It is possible for non-uk-resident companies to be subject to UK income tax (not corporation tax) if, in particular, they own UK real estate from which they derive rental income. Furthermore, that income tax can be reduced by off-setting interest and other costs. Companies subject to UK income tax on this basis will not be caught by these new rules in their current form. 2. Returning to the definitions referred to earlier, the ultimate corporate parent of a worldwide group is any body corporate which belongs to the group but is not a direct or indirect subsidiary of another body corporate. For these purposes, a body corporate does not include the UK government or any foreign sovereign power (which could include certain sovereign wealth funds) but a body corporate could include certain limited partnerships. A relevant subsidiary of an ultimate corporate parent is a company which falls within any of (a) to (c) below: a) A 75% subsidiary of the ultimate corporate parent. This test is based on beneficial ownership of the company s issued share capital, measured by nominal value, not voting rights. b) The ultimate parent company is beneficially entitled to at least 75% of any distributable profits/liquidation surplus available to equity holders of the relevant company. This test depends on detailed technical concepts, more fully set out in Schedule 18 Income and Corporation Taxes Act 1988 ( ICTA ). In essence, it focuses on the percentage entitlements of stakeholders (other than creditors and preference shareholders) to distributable profits or liquidation surplus of the company. c) A company which is a party to a scheme, the main purpose, or one of the main purposes, of which is to secure that it is not a relevant subsidiary for these purposes. This category targets attempts to make companies fail artificially the tests in a) and b) above. 3. International accounting standards will define concepts such as entity, group, parent and subsidiary. Likewise, references to financial statements of the worldwide group usually mean the consolidated financial statements of the ultimate corporate parent and its subsidiaries prepared in accordance with international accounting standards or, where no such statements are prepared, those which would have been prepared if international accounting standards had been applied. Apparently, a list of approved local GAAPs is being considered to reduce the compliance burden of those groups (e.g. US and Japanese groups) which do not apply international accounting standards. -2-

3 4. There is a limited exemption from these new rules for a worldwide group which is not large. A group cannot be large if any member is a micro, small or medium-sized enterprise, as defined in the Annex to EC Commission Recommendation 2003/361/EC. This exemption is very unlikely to apply to any multinational group. THE TESTED AMOUNT 1. This key concept encompasses the deductions at risk of being denied. It requires the calculation, for each period of account of a worldwide group, of the intra-group financing expense of each relevant group company within that group. The legislation targets the expenditure of each such company in respect of borrowings, and other financing arrangements, with other members of the worldwide group, including other UK group members. In particular, the legislation will target upstream loans to UK-taxpaying members of the group from non-uk affiliates. In the past, these have been a favoured method for tax-free profit repatriation. In principle, financing expenses of a UK corporation tax payer which are owed to persons outside the worldwide group are ignored, although there is an exception which is discussed later. 2. The draft legislation defines the intra-group financing expense of a relevant group company by reference to four categories, A-D, subject to important exceptions which are discussed in the next section. 3. Category A covers debits and credits in respect of loan relationships of the relevant company where those loan relationships are group debtor relationships; i.e. loan relationships where the relevant UKtaxpaying company is the debtor; and another member of the worldwide group is the creditor. 4. Category B encompasses the debits and credits of the relevant UK taxpaying company in respect of derivative contracts (e.g., swaps) where there is a hedging relationship between the derivative in question and the company s group debtor relationship(s) (as defined in 3.). For these purposes, a hedging relationship is defined in the UK derivative contracts legislation. Provided that this hedging relationship exists, it is not relevant that the derivative contract is with an unrelated third party. 5. The third category, C, is the total amount that would be brought into account for the purposes of corporation tax by the relevant group company in respect of the financing cost element of payments to other members of the worldwide group under a finance lease of plant and machinery. On the assumption that a finance lease is, in economic terms, a form of lending, this makes sense. Finance lease is not defined. Presumably, the final legislation will define it by reference to international accounting standards. The UK tax authorities ( HMRC ) appear to have chosen not to extend Category C to cover the financing element of rentals under longer-term operating leases. Arguably, the reference to leases of plant and machinery is over-broad. It could, in particular, include long leases of commercial buildings which will include plant and machinery in the form of fixtures. It -3-

4 would be unfortunate if a portion of the rent payable in respect of occupational leases of commercial buildings could fall within this new legislation on the basis that it was attributable to the fixtures content of the relevant building. It would be sensible if leases of background plant and machinery (e.g., escalators, lifts, etc.,) in a commercial building, were ignored for Category C purposes. 6. Category D is the financing cost, if any, that would otherwise be brought into account for tax purposes by the relevant UK company in respect of debt factoring or any similar transaction entered into by it with other members of the worldwide group. This category seems wide. Moreover, the published guidance on the draft legislation indicates that the four categories may be expanded to include the economic equivalent of borrowing via derivative contracts (at the moment only derivative contracts which hedge group debtor relationships are included). Also, further consideration is being given to whether the legislation properly covers borrowing costs implicit in repos and stocklending. 7. Generally, the calculation of the tested amount does not deal adequately with relevant group companies which are non-uk-resident but carry on a trade through a UK permanent establishment. At present, the tested amount covers all the intra-group indebtedness, etc., of such a company whereas it should only cover that element of it which is attributable to the UK permanent establishment. TESTED AMOUNT : AMOUNTS TO BE DISREGARDED 1. There are a number of exclusions from the tested amount for items arising in respect of financial services business, which would otherwise fall within Categories A to D. a) The first exclusion applies where (i) the relevant group company is party to intra-group finance arrangements in the course of activities forming an integral part of a lending business of that company ; and (ii) at least 75% of the gross trading income of that lending business comes from lending to entities outside the worldwide group. Lending activities include, in particular, accepting deposits, the lending of money, factoring, finance leasing, providing guarantees and money transmission services. Gross trading income is income earned from such lending activities and accounted for as such under generally accepted accounting practice (i.e. UK GAAP or IAS), before any deduction for expenses, etc. b) There is a similar but narrower exclusion, for items within Categories A and B only, where the relevant group company is a regulated insurance company and one of two conditions is met. The first is that the company is party to the intra-group finance arrangement in the course of activities forming an integral part of a general insurance business of that company. The second condition is that the company is party to the intra-group finance arrangement in the course of activities forming an integral part of an insurance business other than general insurance; and that intra-group finance arrangement consists of investment acquisition debt. A regulated insurance company is one which is authorised in its territory of incorporation to carry on insurance business. General insurance business has the same meaning as in the official Handbook of the UK Financial Services Authority, the UK financial services regulator. Investment acquisition debt is debt requiring repayment less than one year after it is incurred, by the relevant group company to acquire assets of its long-term life assurance fund. -4-

5 c) The third exclusion is also for items within Categories A and B only. It applies where the relevant group company is party to the intra-group finance arrangement in the course of activities forming an integral part of a financial instrument dealing business. Such a business consists of active dealing in financial instruments, which are broadly defined in the Handbook of the UK Financial Services Authority. 2. The three exclusions in 1. all have a common purpose of limiting the impact of the new interest deductibility restrictions on financial services businesses. However, the exclusions will not apply to all the intra-group borrowings of a company carrying on lending/insurance/financial instrument dealing business in the UK. In particular, activities forming an integral part of a lending business will not extend to any intra-group debt incurred for activities related to, but not forming part of, that lending business e.g., borrowings to finance the acquisition of another bank. Therefore, businesses seeking to take advantage of these exclusions will need to segregate intra-group borrowings into those which do and do not form an integral part of their lending/insurance/financial instrument dealing business. This represents a significant compliance burden. Furthermore, while the 75% of gross trading income limb of the banking exclusion in 1(a) is designed to deny group treasury companies that exclusion, its practical impact may be much wider. 3. There are further exclusions from the interest deductibility restrictions for intra-group debt funding which constitutes regulatory capital. a) The first such exclusion applies to an intra-group finance arrangement which is a capital instrument where the UK Financial Services Authority requires the relevant group company to maintain capital resources at not less than a specified level; and that company uses this instrument to meet that obligation. If such capital instruments make up an unreasonable part of the capital resources of the company, the disregard of these arrangements can be restricted. Limited guidance has been provided about what unreasonable means in this context. b) There is a further exclusion where the relevant group company (defined as the holding company ) does not carry on a trade itself but onlends to one or more regulated subsidiaries at least 90% of the amount borrowed by it under an intra-group finance arrangement. A subsidiary for these purposes means a 75% subsidiary of the holding company. If, and to the extent that any of these subsidiaries can disregard its borrowings from the holding company on the basis that they are capital instruments, then the holding company too can disregard its intragroup finance arrangements which, effectively, fund its on-loans to the regulated subsidiaries. Further rules fine-tune the precise amount of the holding company s debits and credits which can be disregarded in this way, so that the disregard is limited to the amount actually on-lent by the holding company. TESTED AMOUNT : WHEN EXTERNAL FINANCE CAN BE TREATED AS INTRA- GROUP FINANCE 1. In principle, the new rules only apply to intra-group borrowings, not third-party borrowings, of a relevant group company. However, there are anti-avoidance rules to catch relevant schemes involving a relevant group company, another member of the worldwide group, and at least one third party where one of the main purposes of the relevant scheme is to reduce the tested amount from what it would otherwise be by incurring a third-party financial liability. -5-

6 2. In such cases, finance costs incurred in respect of the third-party financial liability are taken into account in computing Categories A, C and D of the tested amount. There are exceptions to this antiavoidance rule, some of which are still to be clarified by regulation. Firstly, external finance is not to be brought into account in this way where the relevant group company is party to a guarantee related to the third-party financial liability and it is reasonable to assume that the third-party financial liability would have been entered into even without the guarantee; or the main purpose of the guarantee is simply to reduce the cost of the third-party liability. In other words, the exception seeks to protect normal cross-guarantees of external finance. 3. Furthermore, these anti-avoidance rules do not apply where the relevant group company is a party to the relevant scheme in the ordinary course of a trade carried on by the relevant group company ; or where the relevant group company is taking part in a cash pooling arrangement. Regulations will set out what a cash pooling arrangement is and when a company participates in it. The part of the second exception relating to the ordinary course of trade seems to be targeted at certain letter of credit arrangements involving external banks which are part and parcel of financing international trade. The words in the ordinary course of trade are fairly narrow, quite apart from the fact that the concept of trade does not include investment business. 4. Generally, it is essential that this anti-avoidance rule is applied with a light touch. The exclusion of external finance costs from the tested amount is a cornerstone of the new rules. To erode it would create serious asymmetries, especially bearing in mind that the tested amount is a gross amount which ignores external finance income of relevant group members. THE AVAILABLE AMOUNT 1. The available amount is the other key concept. It is the ceiling which determines the extent of the disallowance of the tested amount. It is important to note that the available amount for the worldwide group is a net amount: namely, the non-uk external finance expense of that group for the relevant period less its worldwide external finance income for that period. This reflects the fact that the aim of the legislation is to ensure that the intra-group finance expense of UK-taxpaying companies within the worldwide group does not exceed that group s net external finance expense, ignoring third-party financial liabilities of UK-taxpaying companies. 2. In computing this ceiling, only non-uk external finance expense is taken into account but all external finance income (including external finance income of UK-taxpaying group members) is taken into account. Consequently, UK external finance income (e.g., interest on deposits with a third-party bank) is problematic because it does not reduce the tested amount but will reduce the available amount. This is one of the reasons why the exclusions (see above) from the tested amount for certain financial services businesses are so important. The reason why only non-uk external finance -6-

7 expense is taken into account is because, in principle, the tested amount does not catch third-party financial liabilities of UK-taxpaying members of the group. Taxpayers would therefore get a double benefit if such liabilities were also reflected in the available amount. 3. Whereas the tested amount is computed by reference to UK tax concepts, the available amount is determined by reference to the consolidated GAAP accounts of the worldwide group. The two methodologies do not necessarily coincide. In particular, it appears that foreign exchange movements in respect of the principal element of financial liabilities incurred by relevant group companies constitutes financing expense for the purposes of computing the tested amount. This is unfortunate and will hopefully be remedied in subsequent drafts of the legislation. By contrast, the available amount is broadly determined by reference to International Accounting Standard 22 ( IAS 22 ) which ought to disregard foreign exchange movements in respect of the principal amount of financing assets or liabilities. 4. The worldwide external finance expense of the group is the total amount disclosed in its IAS consolidated financial statements in respect of, notably, interest, discounts and premia in relation to borrowings; costs relating to financial instruments where they hedge borrowings; the implicit financing costs in finance leases of plant and machinery ; and financing costs relating to debt factoring. Power is reserved to add to this list in regulations. As indicated in 3., the worldwide external finance expense will also include an adjustment to any of these amounts in respect of foreign exchange movements. Worldwide external finance expense does not include dividends on redeemable preference shares which are treated as a liability in the group s IAS consolidated balance sheet. It should also not include deductions in respect of impairment, IAS 39 derecognition or fair value adjustments. HMRC are considering a rule to prevent intra-group finance expense being reclassified as worldwide external finance expense by interposing third-parties, e.g., under a back-to-back loan. 5. In computing the non-uk external finance expense, the UK external finance expense of the worldwide group must of course be subtracted: see 1. This is that part of the worldwide external finance expense which is reflected in the solus financial statements of UK tax-paying members of the worldwide group (including, in HMRC s view, any UK members which are not relevant group companies). As noted before, this will not include those non-uk-resident companies which pay income tax (notably, non-uk-resident landlords). As in relation to the tested amount, where a company carries on a trade through a UK permanent establishment, then the entirety of its financing expenses are potentially taken into account, rather than just those which are properly attributable to its UK permanent establishment. This appears to be a drafting error. 6. The amounts falling within the worldwide external finance income of the group are, in essence, receipts corresponding to the categories (listed in 4.) of worldwide external finance expense. Again, there is scope for these categories to be expanded by regulations. Dividend income in respect of -7-

8 redeemable preference shares which are recognised as an asset in the group s balance sheet are disregarded. 7. The available amount includes amounts disclosed in the group s consolidated financial statements in respect of a joint venture that is a member of the group. 8. Further rules may be introduced to adjust the available amount where the worldwide group borrows externally in a strong currency (e.g., Yen) but then onlends to its UK members in Sterling. Even if the relevant amounts of Yen and Sterling debt are the same, the disparity between Yen and (higher) Sterling interest rates will tend to push down the available amount, and hence the level of allowable UK tax deductions, if there is no adjustment of the kind proposed. THE AVAILABLE AMOUNT : AMOUNTS TO BE DISREGARDED 1. In calculating the available amount, there are exclusions for financial services businesses and their regulatory capital which are comparable, although not identical, to those which apply when computing the tested amount. Without these exclusions, the available amount in respect of worldwide groups conducting profitable financial services business could well be significantly reduced. 2. When calculating the group s non-uk external finance expense and its worldwide external finance income, an amount disclosed in its financial statements must, in particular, be disregarded if: a) that amount relates to activities of a group member that form an integral part of a lending business and b) if the amount in question is an expense, that member is not a UK corporation tax payer; and c) at least 75% of the gross trading income of the relevant lending business is derived from lending activities with entities outside the group. Lending activities means accepting deposits, lending money, recourse or non-recourse factoring, finance leasing, issuing and administering means of payment (e.g., letters of credit), providing guarantees, and money transmission services. Gross trading income of a lending business is income from such lending activities accounted for as such under generally accepted accounting practice, before any other deductions. The 75% of gross trading income test is designed to exclude group treasury activity from this exception but it may well have a wider impact. 3. In computing the group s non-uk external finance expense, an amount disclosed in the group s financial statements must also be disregarded if it relates to liabilities incurred by a group member that is a regulated insurance company for the purposes of that company s insurance business. For these purposes, a regulated insurance company is one which is authorised to carry on insurance business in its territory of incorporation. When computing the group s worldwide external finance income, an amount disclosed in its consolidated financial statements must be ignored if it relates to -8-

9 assets of a group member which is a regulated insurance company where those assets are acquired in the course of investment activities which are an integral part of an insurance business of that company. This exclusion is therefore quite narrow. 4. In computing the available amount, items in the group s financial statements must also be ignored if: a) they relate to activities of a group member that form an integral part of a financial instrument dealing business of that member; and b) if the amount in question is an expense, that member is not a UK corporation tax payer. For these purposes, a financial instrument dealing business is one which includes trading in such instruments. A financial instrument is anything defined as such by the UK Financial Services Authority. 5. In calculating non-uk external finance expense and worldwide external finance income of the worldwide group, certain amounts disclosed in the group financial statements relating to regulatory capital must also be disregarded. The amounts in question must relate to hybrid or innovative instruments as defined in the Basel II Accord on Capital Adequacy. Furthermore, a member of the worldwide group must be required to maintain regulatory capital, in keeping with that Accord, and must use the hybrid or innovative instrument in order to maintain that capital requirement. 6. In addition, an amount disclosed in the group financial statements (the external finance amount) must be disregarded in certain cases if: a) a member of the group that is not subject to a regulatory capital requirement is a party to a relevant debt arrangement to which the external finance amount relates; and b) that group member on-lends at least 90% of that debt to other group members covered by the exclusion for hybrid and innovative instruments (see 5. above) applies. For these purposes, a relevant debt arrangement is any debt incurred with a creditor outside the worldwide group, together with any derivative contract which hedges that debt. This exclusion for intra-group onlending to regulated entities is similar to the equivalent exclusion in calculating the tested amount. However, because it relates to non-uk arrangements, it is phrased in terms of the Basel II Accord on international capital adequacy, rather than by reference to the UK financial services legislation. Where this exclusion applies, further rules fine-tune the amount disregarded in this way, so that the disregard is limited to the amount actually on-lent by the holding company. DISALLOWANCE OF DEDUCTIONS 1. Where the tested amount exceeds the available amount, the excess is non-deductible and is referred to as the total disallowed amount. UK corporation-tax paying members of the worldwide group must -9-

10 make a special return to HMRC within 12 months of the end of the relevant period showing, in particular, the tested amount for that period, the available amount and the total disallowed amount. The return must be signed on behalf of all those UK-taxpaying companies. It must be signed by each corporation tax-paying company within the group even if it was only such a company for part of the relevant period. Therefore, in the context of company acquisitions and disposals, mechanisms must be put in place for ensuring that companies entering or exiting the worldwide group can still be required to complete and sign such a return where necessary. 2. A special return is not a corporation tax self-assessment return. However, it will affect the content of the corporation tax self-assessment return of relevant group members. In particular, a special return must identify the types of intra-group financing expense (see the discussion of the tested amount) attributable to each corporation tax-paying member of the group and must then specify how much, if any, of these amounts is to be disallowed for tax purposes. The benefit of filing a special return, is that it gives the group flexibility in allocating the total disallowed amount within the group. Without such a return, the total disallowed amount is allocated on a simple pro rata basis across the intragroup financing expense of each group company which is subject to UK corporation tax. 3. There is no basis for carrying forward the total disallowed amount to later accounting periods where there is excess available amount in existence. Equally, there is no scope for carrying forward to a later period excess available amount from an earlier period. In this respect, the draft UK rules are more restrictive than the US earnings stripping rules. EXEMPTIONS FOR INTRA-GROUP FINANCING INCOME 1. The legislation contains two limited exemptions from UK tax on intra-group financing income earned by a UK corporation tax-paying member of the worldwide group where interest expense of any such member has been disallowed. The aggregate amount exempted in this way cannot exceed the total disallowed amount. 2. One of the exemptions covers intra-group finance income received by a UK corporation tax-paying member from another such member. The second exemption relates to intra- group finance income received by a UK corporation tax-paying member from another company which is not a UK corporation tax payer but which is a 75% subsidiary of the same ultimate group parent or is itself that ultimate corporate parent. The overall amount eligible for exemption may be allocated flexibly among the UK corporation-tax paying members of the worldwide group, provided that they file a special return setting out the desired allocation. If no such return is filed, then the legislation imposes a more rigid allocation formula. 3. These exemptions are complex. Much of the complexity seems to arise because the legislation capping interest deductions applies not just in cross-border scenarios but also in purely UK domestic -10-

11 situations (i.e. intra-group debt between UK corporation tax payers). Defining the scope of the legislation in this way presumably avoids concerns that EU freedoms have been infringed by these rules. The first exemption for intra-group financing income seems designed to ensure that there is a UK tax-neutral result overall for the group when the legislation denies deductions in a purely UK domestic context. This does not alter the fact that the legislation may end up shifting taxable profit between UK tax-paying group members, and can lead to situations where interest deductions of a company become stranded because that company has no taxable income against which to set them. 4. These exemptions can also lead to income being exempted in ways which one would not expect. For example, suppose that a UK parent company is funded with 100 of equity and 100 of third-party debt carrying 5% interest. The 100 of debt is placed on deposit with an unrelated bank at 5%. The 100 of equity is used to fund an interest-bearing loan at 5% to a UK subsidiary which then makes an on-loan of 100 at 5% to a French sub-subsidiary. The French company places the money on deposit with an unrelated bank at 5%. In this rather basic example, the available amount is zero and therefore interest paid on the loan to the UK subsidiary is in principle disallowed as a deduction, because that interest is the tested amount. However, the UK parent can claim an exemption up to the amount of the interest which it receives on that on-loan. The UK subsidiary can also claim an exemption up to the amount of the interest which it receives from the French sub-subsidiary. However, the aggregate of the two exemptions cannot exceed the interest disallowance at the level of the UK subsidiary. The overall result is therefore that while the UK subsidiary loses its intra-group interest deduction, an equivalent amount of interest income can be exempted at the level of the UK subsidiary itself and/or its UK parent. A special return must be filed if the group wants maximum flexibility to allocate this exemption. Furthermore, while the income earned on the deposit held by the French sub-subsidiary is presumably taxable in France, there is also presumably a French interest deduction on the loan to the French sub-subsidiary. In short, there is no net French tax liability but the interest paid to the UK subsidiary from the French sub-subsidiary is in principle exempt (see above). By contrast, if the UK subsidiary had not on-lent to the French sub-subsidiary but had itself placed the same amount on deposit with an unrelated bank at 5%, then there would have been no exemption available to the UK subsidiary. 5. One final point needs to be borne in mind, given the relative novelty of the worldwide debt cap. If the UK disallows an interest deduction in respect of an intra-group debt and the creditor is non-ukresident, there is no guarantee that the latter's home jurisdiction will give relief corresponding to the disallowed deduction. There may therefore be a material risk of economic double taxation. It is far -11-

12 from clear that either the UK's double tax treaties or the EC Arbitration Convention provide an effective solution to this problem, e.g. via the competent authority procedure. OTHER ISSUES It is expected that the legislation will be further refined during the first half of In particular: 1. Further regime - specific rules have just been published to deal with interest expense and income in relation to activities subject to the UK s special North Sea corporation tax regime; interest expense and income of UK REITs; and interest expense and income connected with the elective UK tonnage tax regime for shipping. Such income and expense attributable to these special taxing regimes is ignored in the attributable amount, and the tested amount. Special rules are also expected to be published for UK securitisation vehicles. 2. An exclusion is anticipated which will cover cases where a group temporarily holds large cash reserves following a disposal. 3. A gateway is being considered to enable companies to conclude easily whether the new rules affect them without having to apply the rules in detail. It will not be simple to construct a gateway which is EU-law compliant. 4. As currently drafted, the rules will take effect prospectively from a date expected to fall in There will be no grandfathering for intra-group debt of relevant group members in existence at that date. * * * Copyright Sullivan & Cromwell LLP

13 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance and corporate transactions, significant litigation and corporate investigations, and complex regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 700 lawyers on four continents, with four offices in the U.S., including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jennifer Rish ( ; rishj@sullcrom.com) or Alison Alifano ( ; alifanoa@sullcrom.com) in our New York office. CONTACTS London Michael T. McGowan mcgowanm@sullcrom.com Andrew Howard howarda@sullcrom.com Emma Hardwick-Panks hardwicke@sullcrom.com LONDON: