The Ministry of Finance circulated an amended bill on limiting the tax deductibility of interest expenses for comments on 17 September. According to the new bill, the new act would enter into force on 1 January 2013, but would not be applied until the taxation for 2014.
This article focuses on the changes to the Government bill. Information on the contents of the original bill is available in our previous article published in April.
According to the draft bill, the right to deduct interest expenses would be limited with respect to companies whose operations are taxed as a source of business income. This means that, for example, real estate companies would exempt from the limitation, because their income is primarily taxed under the Income Tax Act. The bill also excludes financial, insurance and pension institutions from the scope of the proposed act.
The original bill proposed that net interest expenses would be deductible to the extent that they do not exceed 30% of the result of business, plus interest expenses, tax depreciations, losses and changes in value of financial assets as well as received group contributions (group contributions granted by the company would be deducted in the calculation). According to the new bill, however, interest on related-party loans would be deductible in full if the taxpayer’s equity to balance sheet ratio is equal to or higher than the corresponding ratio of the adopted consolidated balance sheet.
The new bill removes loans that are secured by related party companies from the scope of the proposed legislation with one exception. Interest paid on loans from non-related parties will be deemed to be taken from related parties if they are secured by a back-to-back arrangement consisting of a receivable from a related party company.
The draft bill also states that the limitation provisions would not apply to interest paid on bonds or to cash pooling arrangements in which the assets of the group companies are managed centrally by one group company.