Exemptions and Renewable energy
New UK legislation in the Finance Bill 2017 will implement OECD recommendations to restrict the amount of interest that can be deducted for corporation tax purposes from 1 April 2017.
Without special treatment these restrictions could have a severe impact on some highly capital intensive projects, such as many renewable energy and other infrastructure installations.
This note considers the circumstances for the application of the main exemption from corporate interest restrictions to renewable energy projects.
The draft legislation does include an important exemption described as the public benefit infrastructure exemption.
The exemption applies in a number of circumstances but this note briefly describes the main rules likely to be of relevance in a renewable energy project.
The exemption applies to a qualifying infrastructure company (QIC) (or to a group of such companies).
For a company to be a QIC it must meet three specific tests. The tests are:
• A public infrastructure income test In order to meet the income test all (or all but an insignificant proportion) of the income must derive directly from qualifying infrastructure activities.
• A public infrastructure assets test Similarly for the assets test the assets must be all (or all but an insignificant proportion) tangible assets related to qualifying infrastructure activities.
• A comparative debt test The comparative test requires that the proportionate debt levels of the QIC (and any associated QICs) are not significantly higher than other companies (non-QIC) in the worldwide group carrying on similar activities.
Qualifying infrastructure activities include the provision of a public infrastructure asset which term includes electricity and gas facilities. To qualify, the asset must be a tangible asset forming part of the UK infrastructure, be on the group balance sheet and have an expected economic life (in use) of at least ten years as well as meeting a public benefit test.
An asset meets the public benefit test if it is either used in a regulated activity (subject for example to regulation by a public authority including (in relation to energy) the Gas and Electricity Markets Authority, the Office of Nuclear Regulation, the Oil and Gas Authority and the Northern Ireland Authority for Utility Regulation.
The company must also be fully taxable to corporation tax in the UK and must make an election to be treated as a QIC. (The election cannot be reversed for at least five years.)
If the election is made, interest costs arising to the QIC are not subject to the new corporate interest restriction at all provided that:
• the creditor is not a related party, and
• recourse of the creditor is limited to the relevant infrastructure matters (ignoring guarantees given externally or by public bodies)
It is possible therefore that renewable energy projects can be structured such that the new restrictions which will limit deductions for interest for corporation tax purposes do not apply.
This is perhaps unexpected, as it was thought that such projects would not be capable of so qualifying. However, the exception does not apply to related party debt, and some of the conditions may be difficult to satisfy or inadvertently breached, so careful consideration should be given to funding structures following the introduction of the new rules.