GREIT13035 - Joint ventures: Joint Venture Look-Through Notice: interest cover test

The profits and financing costs of the joint venture are taken into account in deciding whether the interest cover test is met.

Venturing company – regulation 6(3) SI 2006/2866

For a venturing company, the test imposes additional tax on the venturing company if the following fraction is less than 1.25:

For this purpose, ‘Profits’ are those of the tax-exempt business of the company – which includes the proportion of profits of the property rental business of the joint venture company that represent the venturing company’s interest in the joint venture company. As with the interest cover test generally, it is profits before the deduction of capital allowances.

‘Financing Costs (JV)’ are the financing costs (as defined section 115(4) FA 2006) of the company’s property rental business, again extended by the inclusion of the relevant portion of the property rental business of the joint venture company.

‘Financing Costs (external)’ is the sum of the external financing costs of C (tax-exempt) and the relevant share of the external financing costs of the joint venture company’s property rental business. Interest etc on loans between the venturing company and the joint venture company are ignored for this purpose.

Venturing group

For a venturing group, the same effect is achieved by way regulations 6 and 9 of the Financial Statement regulations (SI 2006/2865). Regulation 9 brings the profits, expenses etc of the joint venture company into the group’s financial statements. Regulation 6 then provides the rule for working out Financing Costs (External) that includes the joint venture company’s financing costs. These numbers then feed into the paragraph 14 Schedule 17 FA 2006 modification of the interest cover test that applies to a Group REIT. This is explained in GREIT12150 onwards.