e_dipn13a_Interest Expense_s16(2ABC)

B the provision for restricting interest deduction

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Unformatted text preview: ngs; and any scheme, plan, proposal, action or course of action or course of conduct. (b) The provision for restricting interest deduction will be invoked whenever arrangements are in place, irrespective of whether the passing of interest has actually occurred. 28. In this section, the reference to “any sum payable by way of interest on the loan borrowed” is expanded by section 16(2E)(a) to cover the payment of interest or principal in respect of any other loan, the repayment of which is secured by the payment of interest or repayment of principal of the loan in question (e.g. the second loan is advanced by way of sub-participating in the first loan borrowed by the borrower). Example 11 Company H borrowed a loan of $100M from Bank J. Bank J entered into a loan sub-participation arrangement with Company K, which is an associated company of Company H. Under the arrangement, Company K advanced a loan of $100M to Bank J on the condition that the repayment of principal and interest of this loan by Bank J to Company K would only be made on the condition of the repayment of principal and interest of the bank loan by Company H to Bank J. In practical terms, Bank J is risk free. 14 In this situation, the interest paid by Bank J to Company K is treated as if it were the interest on the loan borrowed by Company H from Bank J when the restriction of section 16(2B) is considered. As the interest was paid to an associated company of the borrower (Company H) of the loan, the interest deduction claim would be denied. Interest Apportionment 29. Triggering the application of section 16(2B) does not necessarily mean that the whole amount of interest incurred on a loan will be disqualified for deduction. Indeed the section allows for apportionment of interest expenses in two ways – The provision applies to arrangements that cover interest payable on a part of a loan, and this allows apportionment of interest in the case where only part of the loan in question is subject to an arrangement under...
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This note was uploaded on 03/11/2010 for the course BBA B415 taught by Professor Mrli during the Spring '10 term at Academy of Art University.

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