Covid-19 Tax Measures Act: Interest Barriere in Austria
With the Covid-19 Tax Measures Act, the so-called “interest barrier” required by EU law was incorporated into the Austrian Corporate Income Tax Act – KStG. The aim of the new Section 12a KStG is to restrict the deductibility of genuine interest expenses for certain corporations. In this respect, the net tax principle is thus broken. However, the provision offers starting points for practical structuring options that can be useful in dealing with the restriction in practice.
Cornerstones of the Interest Barrier
As of Jan. 1, 2021, interest expenses, specifically the interest overhang, are only tax deductible up to 30% of the tax EBITDA. The interest overhang is determined by the excess of tax-deductible interest expenses over taxable interest income.
|The taxable EBITDA is to be determined as follows:
Total taxable income before application of the interest barrier
+ net interest expense
+/- tax depreciation/amortization of non-current assets
= Taxable EBITDA
As a significant exception to the interest barrier, Section 12a KStG provides for an allowance of EUR 3 million per corporation and assessment period. Up to this amount, excess interest is deductible in any case, irrespective of the amount of the tax EBITDA. However, if there is a group of companies for tax purposes pursuant to Section 9 KStG, this allowance is only available once for the entire group of companies.
Starting points for optimization within the group
1. Restructuring of intra-group debt financing
The interest barrier only covers the so-called interest surplus. Consequently, the extent of the deduction restriction can be reduced by decreasing the interest surplus, e.g. by reducing interest expenses or increasing interest income, as follows:
Substituting rent for interest expense.
The interest overhang can be reduced by substituting interest expenses for other (financing) expenses on the expense side. For example, a company could consider renting a needed item instead of purchasing it with debt financing. This would reduce the interest expenses since in substance there are no interest expenses but rental expenses. However, this does not apply if beneficial ownership of the leased asset is transferred to the lessee; in economic terms this would be a credit-financed installment purchase.
Local shifting of interest expense
In addition, companies are free to reduce the interest overhang by shifting the interest expense abroad, i.e. by borrowing capital from foreign group companies in order to pass it on to Austrian companies as a contribution. The usefulness of this consideration is, of course, largely dependent on the interest deduction restrictions in the respective foreign country.
Increase in interest income
Furthermore, the reduction of a harmful interest overhang can be achieved by generating additional interest income, e.g. by subscribing to bonds or extending loans to subsidiaries not affected by the interest barrier.
If it is not possible to reduce the harmful interest overhang to below EUR 3 million or below 30% of the taxable EBITDA by changing the operational or intra-group financing structure, measures of international earnings management can be considered. In particular, if the effective income tax burden abroad is higher than in Austria, profits could be shifted to the domestic market by establishing or expanding domestic locations or by performing intra-group services/functions in the domestic market or from the domestic market.
2. Restructuring of the tax EBITDA
The interest overhang is only immediately deductible in the amount of 30% of the tax EBITDA. Thus, an increase in the deduction volume for the interest overhang incurred in the fiscal year can be achieved via a targeted increase in the tax EBITDA.
Disclosure of hidden reserves
The simplest way to increase the tax EBITDA is to dispose of assets by disclosing hidden reserves. As a one-off effect, this generates taxable extraordinary income, which increases the relevant profit of the business and, thus, the deduction volume, i.e. the tax EBITDA. Additional tax optimization is possible here for those taxpayers who can offset existing loss carryforwards, which may be in danger of being lost, against the corresponding capital gains.
Particularly in the case of non-capitalized intangible assets (e.g. patents created in-house), a sale and lease (license) back would be an effective means of achieving this objective while safeguarding the interests of the company. The associated improvement in the equity ratio is a further effect that can be used for tax purposes, possibly for the equity escape clause.
Change in the corporate or group structure
Company or group restructurings are also suitable for increasing the share of deductible interest expenses, whereby restructurings are carried out as far as possible by way of tax-neutral reorganizations under application of the Reorganization Tax Act (Umgründungssteuergesetz – UmgrStG). For example, the contribution of profitable businesses enables an increase in the taxable EBITDA of companies for which the use of the tax allowance is no longer open due to exceeding the EUR 3 million tax allowance.
TPA Tip: Restructurings could possibly be used to reallocate previously unused interest and EBITDA carry-forwards to companies.
3. Better use of the tax allowance
The interest barrier does not apply insofar as the total interest overhang of the company in question does not reach the exemption amount of EUR 3 million. The starting point for optimization could therefore be an improved utilization of the allowance:
Splitting of acquisition transactions
Debt-financed acquisitions of a certain size can easily lead to the acquirer exceeding the exemption amount. A “multiplication” of the exemption amount can be achieved in suitable cases by splitting the acquisition and debt financing, and thus also the interest overhang, among several acquisition companies, whose interest overhang in each case remains below the exemption amount of EUR 3 million.
Restructurings can serve to multiply the tax allowance of EUR 3 million by “fanning out” a business through a spin-off/contribution of partial businesses into several separate legal entities. The respective tax advantages and disadvantages, e.g. with regard to the continuation or elimination of existing loss and interest carryforwards, must of course be carefully examined in advance of such reorganizations.
Spin-off from corporate groups
In order to be able to make use of an additional tax allowance of EUR 3 million in each case in tax groups of companies, it may make sense to have individual group members leave the existing group of companies in good time before the end of the fiscal year. Attention should be paid to the contractual provisions of the group contribution agreement and the consequences of the dissolution.
In summary, it can be said that the interest deduction potential can in any case be optimized in the group in the future despite the interest barrier. Of course, as the individual points show, this always involves more or less far-reaching business decisions, so that a large number of factors must be taken into account when making optimization decisions.
If you have questions about the Zinsschranke | § 12 KStG contact our tax experts!