Taxes Consolidation Act 1997 section 697LB

Treatment of finance costs

Section 697LB restricts the tax deductibility of finance costs for tonnage tax companies and tonnage tax groups to prevent the artificial allocation of debt to non-tonnage tax activities.

• Finance costs are broadly defined to include interest, foreign exchange gains and losses on debt, finance lease costs, debt factoring costs, and any other costs arising from financing transactions under generally accepted accounting practice.
• Where a tonnage tax company's or group's deductible finance costs outside the tonnage tax trade exceed a fair proportion of its total finance costs, an adjustment must be made on a just and reasonable basis to increase taxable profits from non-tonnage tax activities.
• The fair proportion test recognises that debt finance is fungible and requires that the allocation of finance costs between tonnage tax and non-tonnage tax activities reflects the extent to which borrowings actually fund each type of activity.
• No adjustment is required where, in calculating the deductible finance costs outside the tonnage tax trade, the amount of costs and losses is exceeded by the amount of profits and gains.