Limitations to the right to deduct interest in business taxation

Limitations to the right to deduct interest in business taxation

The Ministry of Finance has proposed limiting the deductibility of interest expenses in the taxation of business income. The limitation would apply to the deductibility of net interest expenses, i.e. the difference between the company’s interest expenses and interest income. The deductibility would be capped at 30 % of the company’s EBITDA. However, net interest expenses not exceeding EUR 500,000 are fully deductible despite exceeding 30 % of the EBITDA. In addition, net interest expenses are fully deductible to the extent they exceed the company’s net interest expenses of loans to affiliate entities.

If the proposed limitations were to be enacted, interest expenses would in practice be fully deductible, if the company’s interest expenses does not exceed the company’s interest income by more than EUR 500,000. In addition, the limitation would limit the deductibility of interest expenses paid to affiliate entities. Parties are considered affiliated, if one party has decision-making power in the other party, or if a third party directly or indirectly has decision-making power in both parties.

The proposed amendments would not limit a company’s right to deduct interest expenses paid to non-affiliate parties, e.g. to a bank.

The proposition was made in a draft government proposal in April 2012. The draft is undergoing review and the final government proposal is expected to be issued by the end of autumn 2012, with the amendments entering into force on January 1, 2013. The limitations would be applicable to the tax year 2013.

If adopted in accordance with the draft proposal, the amendments would greatly impact intra-group debt structuring, affecting previously tax-effective financing arrangements.