Rules for Restriction on Deductibility of Interest for Controlled Transactions Amended

The Income Tax (Restriction on Deductibility of Interest) Rules 2019 [P.U.(A) 175/2019] (“Principal Rules”) have been amended by the Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 [P.U.(A) 27/2022] (“Amendment Rules”) which came into effect on 1 February 2022.
The Principal Rules, inter alia, restrict the amount of interest that can be deducted by specified persons who have been granted financial assistance1 in a controlled transaction. For this purpose,  a ‘controlled transaction' is defined in section 140C(3) of the Income Tax Act 1967 (‘the Act’) as financial assistance: 

  1. between persons one of whom has control over the other; or 

  2. between persons both of whom are controlled by some other person. 
The Amendment Rules amend the Principal Rules in the two respects discussed below.
Qualifying deduction
Rule 4 of the Principal Rules limits the maximum amount of interest that can be deducted in a basis period for a year of assessment in respect of a controlled transaction to an amount equal to 20% of the amount of ‘tax-EBITA’ of a person. One of the components in the calculation of the amount of ‘tax-EBITA’ under rule 5 is the total amount of the ‘qualifying deduction’ allowed.
Before the Principal Rules were amended, ‘qualifying deduction’ meant: 

  1. an amount equal to the amount of expenditure incurred by a person computed in any deduction falling to be made under the Act where the amount of the deduction is twice the amount of the expenditure incurred by a person; 

  2. any claim for deduction under any rules made under section 154(1)(b) of the Act where the deduction is allowed for the purposes of ascertaining the adjusted income of the person. 
The Amendment Rules replace the definition of ‘qualifying deduction’ in the Principal Rules with the following: 

  1. where there is business expenditure incurred in the profit and loss account (‘P&L Account’) allowed as a deduction under the Act and the amount of the deduction allowed exceeds the amount of business expenditure incurred, an amount equal to the difference between the amount of the deduction and the amount of the business expenditure incurred in the P&L Account; or 

  2. where there is no business expenditure incurred on the P&L Account, the amount of the deduction allowable under the Act. 
Carrying forward of 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 to subsequent years of assessment has been expanded and now applies to any person, namely a company, a limited liability partnership, a corporation sole and a body of persons (i.e. any unincorporated body of persons including a Hindu joint family but excluding a partnership).
The Amendment Rules have also clarified that the condition in Rule 6(2) of the Principal Rules which imposes a condition (i.e. the shareholding of the company) that restricts the carrying forward of excess interest only applies to a company and not to other persons who are allowed under rule 6(1) to carry forward excess interest.  
Taxpayers who are involved in controlled transactions should reassess their tax position to ascertain the tax exposure in respect of the interest restriction on such transactions given that the definition of qualifying deduction has undergone a total revamp.
Alert prepared by Desmond Liew (Senior Associate) of the Tax Practice of Skrine.

1 The expression ‘financial assistance’ includes loan, interest bearing trade credit, advances, debt or the provision of any security or guarantee (section 140C(3) of the Act).

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact