Interest limitation rule: Introduction planned for 1 January 2021

27/11/20

On Friday, 20 November 2020, the legislative motion for the implementation of an interest limitation rule in the Austrian Corporate Income Tax Act was introduced in order to transpose the respective provision of the EU Anti-Tax Avoidance Directive. Accordingly, a company’s financing expenses will in future – with numerous exceptions – be deductible only up to a maximum extent of 30% of the EBITDA.

Below you will find an overview of the key points of the planned interest limitation rule.

Scope and entry into force

  • Scope: Corporations subject to unlimited tax liability, as well as corporations subject to limited tax liability with a permanent establishment (PE) in Austria.
  • Entry into force: 1 January 2021
  • Applicable to fiscal years beginning after 31 December 2020

General rule

  • Net interest expenses are deductible up to 30% of the EBITDA (based on tax figures)
  • Net interest expenses = deductible interest expenses – taxable interest income
  • EBITDA = Total amount of income before application of the interest limitation rule + net interest expenses + depreciation/amortization

Exceptions

  • Allowance: Net interest expenses in the amount of EUR 3m are deductible in any case.
  • Stand-alone exception: The interest limitation rule will not apply if a company is not fully included in a group’s consolidated financial statements and has no associated enterprise or foreign PE.
  • Equity escape clause: Full deduction of net interest expenses if the equity ratio of the company is equal to or higher than the equity ratio of the group, in whose consolidated financial statements the company is fully included (shortfall of up to 2 percentage points below the group equity ratio is permissible).
  • Grandfathering clause: Interest on contracts concluded prior to 17 June 2016 are excluded from the scope of the interest limitation rule until the assessment for 2025.

Options to carry-forward

  • Interest carry-forward: A carry-forward, without time limitation, of interest expenses which cannot be deducted in the current tax period due to the interest limitation rule to subsequent fiscal years
  • EBITDA carry-forward: A carry-forward, with a time limitation of five years, of unused EBITDA to subsequent fiscal years

Specific rules for tax groups

  • Mandatory, exclusive application of the interest limitation rule on the level of the group parent
  • Group net interest expenses are deductible up to 30% of the group EBITDA
  • Group net interest expenses and group EBITDA refer to the interest and/or EBITDA of group parents, Austrian group members, and Austrian PEs of foreign group members.
  • An allowance in the amount of EUR 3m applies for the entire group (not for each group member)
  • Equity escape clause: Comparison of the equity ratio of the tax group with the equity ratio of the group of companies for accounting purposes; preparation of consolidated financial statements of the group parent, the Austrian group members and the Austrian PEs of foreign group members required.
  • Interest and EBITDA carry-forward on the level of the group parent

Conclusion and outlook

While the interest limitation rule based on the EU Anti-Tax Avoidance Directive was generally supposed to be implemented into national law by 31 December 2018, Austria wanted to make use of the extended implementation period – permissible under certain conditions – of 31 December 2023. However, the European Commission announced that the prerequisites for use of the extended implementation period were not fulfilled in Austria’s case, which is why Austria could ultimately not make use of the extended implementation period.

In transposing the interest limitation rule into national law, Austria made use of numerous optional exceptions from the underlying EU Directive (no “gold plating”). However, the existing limitations of interest deduction remains unaffected (limitation of deduction of interest expenses in connection with leveraged intra-group acquisitions of a shareholding; limitation of deduction of intra-group interest payments, which are subject to low taxation at the level of the recipient).

When considering the financing structure of a company, an additional complex rule will therefore need to be taken into account in future. The effects of the interest limitation rule on existing leveraged financing should also be analysed in a timely manner, in order to prevent undesired effects from the limited tax deductibility of interest expenses.

The full text of the draft legislation can be found here (German).

Author: Matthias Mayer

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Editor: Eva Ebner, eva.ebner@pwc.com

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