Austria wants to decide still this year on the implementation of an interest limitation rule as of 1 January 2021. Austria is obliged to do so on the basis of Art 4 of the Anti-BEPS Directive, as the EU Commission has considered Austria’s already existing interest deduction clauses not equivalent and has therefore demanded an earlier implementation of the interest deduction limitation in the sense of the Directive (for details see BKR Article 21/2018). In future, interest will only be deductible up to 30% of the tax EBITDA of the respective financial year. The regulation aims to minimize tax advantages of group companies due to high debt financing, whereby interest is subject to the tax deduction in high-tax countries and the taxation of interest is simultaneously shifted to low-tax jurisdictions. The provision should apply to companies with unlimited tax liability acc to Sec 1 Para 2 lit 1 CITA and foreign companies with limited tax liability that operate via a P/E in Austria.
The interest limitation rule
The new provision foresees that net interest expenses can only be deducted up to 30% of the taxable EBITDA. What does this mean in detail? The term net interest expenses describes the difference between deductible interest expenses and taxable interest income. The taxable EBITDA covers the total income before application of the interest deduction limitation clause + net interest expenses + depreciation. For better understanding see the following depiction:
„Interest“ in that sense is defined based on the EU directive and includes any remuneration for debt financing including payments for procurement & other economically equivalent remuneration.
- Application of the interest limitation rule: 30% of the above described taxable EBITDA is the upper limit for the deduction of the net interest expenses.
The interest limitation rule does not apply in the following cases:
- Net interest expenses are at all events deductible up to EUR 3 million per assessment year (exemption threshold)
- The entity is not fully included in the consolidated financial statements and does neither have an affiliated company nor maintains permanent establishments abroad (stand-alone exception)
- The equity ratio of the company (or of the entire domestic group of companies) is greater than (or equal to) the equity ratio of the company group where the entity (or the parent company of the domestic company group) is fully included in the consolidated financial statements (comparison of equity ratios)
- Interest deduction deriving from contracts concluded before 17 June 2016 will not be limited until the 2025 assessment (Exception for existing agreements)
Interest carry forward
If an interest surplus is not deductible in one year due to the interest limitation clause, it can be carried forward indefinitely in subsequent years. For example, if the interest limitation amounts to EUR 4 Mio. and the net interest expenses amount to EUR 5 Mio. the remaining million can be carried forward.
EBITDA carry forward
As interest, “unused” EBITDA can also be carried forward for a further five years. For instance, if the interest limitation amounts to EUR 4 Mio. and the net interest expenses amount to EUR 3 Mio. there will only be a deduction of EUR 3 Mio. in year one. In year two the remaining million of unused EBITDA can be added to the interest limitation of year two.
Specifics in case of a company group
In a group of companies acc to Sec 9 CITA, the interest limitation rule is applied at the level of the group parent in the CIT return. Consequently, interest surplus and EBITDA are to be calculated for the entire group. The EBITDA must be calculated for the entire group.; the exemption threshold (EUR 3 Mio; see above) applies to the whole group.
The interest limitation rule is a complex tax tool that needs to be taken into consideration when determining tax-optimized company structures in the future. Due to extensive options granted in the EU Anti-BEPS Directive, the interest limitation rule may vary considerably among the member states, thus further complicating the tax planning when it comes to cross-border situations. Besides, it is highly recommended to estimate the interest surplus as well as the tax EBITDA from 2021 onwards in order to be able to implement appropriate measures at an early stage if necessary. Adjustments of tax compensation agreements might also be necessary, especially regarding the question of how a group member is compensated for a lost interest or EBITDA carry-forward or who bears the risk of non-deductible interest.