835AAI. Equity ratio

(1) In this section, “ratio of equity over total assets” means the following fraction expressed as a percentage:

E/A

where—

E is the equity, including share capital, share premium and reserves of a relevant entity, worldwide group or single company worldwide group, and

A is the total assets, of a relevant entity, worldwide group or single company worldwide group,

in each case, as disclosed in the financial statements of the relevant entity, worldwide group or single company worldwide group, as the case may be, which are prepared under generally accepted accounting practice or an alternative body of accounting standards.

(2) For the purpose of calculating the ratio of equity over total assets for a single company worldwide group, the amount to be included as E in the formula in subsection (1) shall be increased by an amount equal to the amount owed by the relevant entity to its associated enterprises which gives rise to deductible interest equivalent.

(3) This section applies to a relevant entity in respect of an accounting period where—

(a) the relevant entity’s ratio of equity over total assets is greater than, equal to or not more than two percentage points less than the worldwide group’s ratio of equity over total assets, calculated on the basis of the ultimate consolidated financial statements relating to the period in which the relevant entity’s accounting period ends, or

(b) the relevant entity is a member of a single company worldwide group, the relevant entity’s ratio of equity over total assets is greater than, equal to or not more than two percentage points less than the single company worldwide group’s ratio of equity over total assets calculated on the basis of the financial statements relating to the period in which the relevant entity’s accounting period ends.

(4) Where, in the period of 6 months prior to the end of an accounting period of a relevant entity, a scheme or arrangement is entered into which results in an increase in the amount represented by E in the formula in subsection (1) for the relevant entity, the effect of that scheme or arrangement shall not be taken into account in calculating the relevant entity’s ratio of equity over total assets for that accounting period, unless—

(a) it is shown that the scheme or arrangement was entered into for bona fide commercial reasons, and

(b) it is not reasonable to consider that the scheme or arrangement is, or forms part of, any scheme or arrangement of which the main purpose, or one of the main purposes, is the satisfaction of paragraph (a) or (b) of subsection (3).

(5) Where arrangements are entered into by any person and it is reasonable to consider that the main purpose, or one of the main purposes, of the arrangements, or any part of them, is the avoidance of an increase, in accordance with subsection (2), in the amount included as E in the formula in subsection (1), subsection (2) shall apply as if the arrangements, or that part of them, had not been entered into.

(6) Subject to section 835AAJ(2) and (3), where this section applies in respect of an accounting period of a relevant entity, the relevant entity may make an election under this subsection.

(7) Where a relevant entity makes an election under subsection (6) in respect of an accounting period, section 835AAC shall not apply to the relevant entity in respect of the accounting period.