#budget2016 - Restrictions on corporate interest expense will start from April 2017 #BEPS creating uncertainty for the real estate sector

“#budget2016 – The Chancellor has confirmed that, from April 2017, restrictions on corporate interest expense will be implemented in line with the OECD’s Base Erosion & Profit Shifting (BEPS) recommendations.  This includes a “fixed ratio rule” which will restrict net corporate interest expense to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA).  It will be supplemented with a “group-ratio rule” to account for groups with high external gearing and an exemption for certain public infrastructure projects.  Draft legislation will become available after a 2nd round of consultation with interested parties.  This may be unwelcome news to many who are concerned about the impact these rules may have in the real estate sector (and may have been expecting a longer period of consultation before implementation).  Currently, the OECD recommendations do not suggest special rules to apply in a real estate context.  The proposed restrictions to corporate interest expense will apply to a company’s total interest – i.e. both 3rd party and related party debt.  This creates a stark problem for the real estate sector which is, by its very nature, a very highly-geared industry with high interest costs.  So, companies investing in (or developing) property may, in future, be restricted on the tax deductions they can take on their 3rd party debt – which poses a very low BEPS risk – let alone related party debt.  The further reduction in the rate of corporation tax to 17% will, to some extent, counter-balance the restrictions on corporate interest expense.  However, a failure to address specific concerns about the application of these rules in a real estate context could threaten investment into the property sector ultimately as a result of concerns from investors about the potential impact these rules may have on their investment returns.