On November 20, 2020, an initiative motion was submitted to the parliament, which suggests to introduce an interest limitation rule as of January 1, 2021. The introduction of this provision in Austria aims to comply with the EU’s Anti-Tax Avoidance Directive to combat tax avoidance. In this context, (excessive) interest payments are to be limited by restricting their deductibility. The interest limitation rule stipulates that interest surpluses are deductible up to a maximum of 30% of the tax EBITDA and supplements the already existing prohibition to deduct externally financed acquisitions of participations within a group as well as interest payments to low-taxed group companies.
General information on the planned interest limitation rule
In addition to the basic rule that interest surplus is only deductible to the extent of 30% of the tax EBITDA, the draft law provides for an allowance of EUR 3 million. Up to this amount, the interest surplus will be tax deductible, independent of the actual amount of the tax EBITDA in the respective year. If there is no interest surplus because the interest income is higher than the interest expenses, the provisions of the interest limitation rule are inapplicable.
The legislator defines “interest surplus” as the excess of tax-deductible interest over taxable interest income of a financial year.
Furthermore, it is clarified that the term “interest” is to be understood as any remuneration for debt capital, including all payments for its procurement, such as fund-raising costs or financing costs within the framework of finance leasing and any other remuneration, which are economically equivalent.
The “tax EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization) is calculated as
- the total earnings for tax purposes (before consideration of the effects of the interest limitation rule),
- increased by the tax-effective depreciation,
- increased by the interest surplus and
- reduced by any tax-effective write-ups.
TIP: Tax-free income, such as exempt income from investments, is not part of the total amount of income and is therefore not included in the tax EBITDA.
Carryforward of the interest surplus
If the interest surplus exceeds the tax-free amount of EUR 3 million, the deductibility is limited to 30% of the tax EBIDTA. If the interest surplus exceeds EUR 3 million and 30% of the tax EBITDA (= off-settable EBITDA) and is therefore not tax-deductible in the current financial year, it can be applied for carrying forward the remaining interest surplus for an unlimited period to subsequent years. In any following year it can then be offset up to the tax-free amount of EUR 3 million or up to 30% of the respective year’s tax EBITDA.
EBITDA carryforward possible in five subsequent years
If the off-settable EBITDA exceeds the interest surplus, the excess EBITDA can be carried forward to subsequent years upon application. However, the carryforward is limited to the following five financial years. The EBITDA carryforward increases the off-settable EBITDA until it is offset in any of the following five years and thus increases the potential for asserting the interest surplus.
TIP: The Interest surplus as well as EBITDA-carryforward both require an application of the respective tax subject.
Who is subject to the interest limitation rule?
The provisions of the interest limitation rule are applicable to corporations with unlimited tax liability (e.g. Ltd, Plc, private foundations, cooperatives) and (foreign) corporations with limited tax liability, which have a domestic permanent establishment. However, there’s an exception (“stand-alone exception”) if a corporation
- is not fully included in a consolidated financial statement and
- has no affiliated company (definition in the sense of a controlled foreign corporation) and
- does not maintain a foreign permanent establishment.
TIP: Due to the far-reaching exemption – especially for stand-alone companies – the scope of the interest limitation rule will be limited in practice.
Exception for companies belonging to a group (“equity escape clause”)
Notwithstanding the afore described general rule, the draft law provides for an exemption for entities that are fully included in consolidated financial statements prepared in accordance with the Austrian Corporation Code (UGB), IFRS or other comparable accounting standards. For these corporations, interest expense may be fully deducted if the equity ratio of the entity equals or exceeds the equity ratio of the group, whereby a shortfall of up to 2% (rule of tolerance) is not harmful. The equity ratios are determined on the basis of the consolidated and individual financial statements respectively.
Special provision for tax groups
The draft law also contains a special provision for tax groups. In the case of tax groups, the interest limitation rule is only to be applied at the level of the tax group leader when determining the combined taxable profit. In principle, tax groups are also entitled to an allowance of EUR 3 million (group allowance), but this amount applies to the entire group of companies, i.e. to the tax group leader and all group members together. Any group interest surplus exceeding the allowance of EUR 3 million is in turn only deductible to the extent that it is covered by the off-settable group EBITDA (30% of the taxable group EBITDA). Any group interest surplus or off-settable group EBITDA can be carried forward in accordance with the general rules (please see above) and can be offset in subsequent years. Tax group leaders that are fully included in consolidated financial statements can deduct the interest surplus for tax purposes without restriction if their equity ratio equals or exceeds the equity ratio of the group (please see above).
TIP: Therefore, it is also possible within a CIT group to prepare “fictitious” sub-consolidated financial statements for the group (“group financial statement”) in order to be able to use the “equity escape clause” if necessary.
Special rules for contracts concluded before June 17, 2016
Last but not least, it should be noted that in case of so-called “old contracts” – i.e. financing contracts concluded before June 17, 2016 – interest expenses are without restriction fully tax deductible in the assessment years 2021 to 2025. As of the assessment 2026, the restrictive provisions will have to be taken into account for “old contracts” as well.
When does the interest barrier take effect?
The provisions concerning the interest limitation rule shall be applicable for the first time in financial years beginning after December 31, 2020. Therefore, the interest limitation rule will apply starting 2021 in case of a standard balance sheet date and from 2021/2022 onwards in case the financial year differs from the calendar year.
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