The Income Tax (Restriction on Deductibility of Interest) Rules 2019 (“Principal Rule”) have been amended by the Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022(“Amendment Rules”) which came into effect on 1st Feb 2022.
The Principal Rules, among other things, limit the amount of interest that some people who have received financial assistance in a controlled transaction may deduct. Section 140C (3) of the Income Tax Act of 1967 defines a “Controlled Transaction” for these purposes as financial support:
a) Between persons one of whom has control over the other, or
b) Between persons both of whom are controlled by some other person.
1. Qualifying Deduction
The maximum amount of interest that may be deductible in a basis period for a year of assessment concerning a controlled transaction is capped at 20% of a person’s “tax-EBITA” according to Rule 4 of the Principal Rules. The entire amount of the permitted ‘qualifying deduction’ is one of the factors considered when determining the amount of “tax-EBITA” under Rule 5.
The Amendment Rules replace the definition of ‘qualifying deduction’ in the Principal Rules with the following:
2. Carrying forward excess interest
The scope of Rule 6(1) of the Principal Rules that allows a company to carry forward any interest expense exceeding the amount ascertained under Rule 4 if the Principal Rules to subsequent years of assessment has also been expanded under the Amendment Rules and now applies to any person.
The Amendment Rules further clarify that the condition in Rule 6(2) of the Principal Rules only applies to a company and not to other persons who are allowed to carry forward excess interest under Rule 6(1) of the Principal Rules.
Previously, this provision only applied to companies.
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