The Ministry of Finance submitted a bill on limiting the tax deductibility of interest expenses to Parliament on 1 November 2012. The final bill is largely in line with the draft bill, which was circulated for comments. Pursuant to the bill, the new act would enter into force on 1 January 2013, but would not be applied until the taxation for 2014.
Who Do the New Limitations Apply To?
According to the 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.
Main Contents of the Bill
According to the bill, interest expenses would be fully deductible up to the amount of interest income. Interest expenses exceeding interest income (net interest expenses) would, however, be deductible to the extent that the net interest expenses do not exceed EUR 500,000 during the tax year.
If the net interest expenses exceed the annual EUR 500,000 threshold, they must be compared to the adjusted result of business. Net interest expenses will 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). Net interest expenses exceeding this amount would not be deductible. The amount of non-deductible interest would nevertheless be, at most, the amount of interest paid to related-parties during the tax year. However, according to the bill, 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.
According to the bill, loans can be considered related-party loans, even if they are taken out from third parties. Loans 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 provided to the non-related creditor (such as a non-related party bank).
The 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.
It will be possible to carry non-deductible net interest expenses forward to the following tax years (non-deductible net interest expenses). However, the losses carried forward are subject to the same limit on deductions in the following tax years.
Effect on Transactions
The non-deductible net interest expenses will transfer to the receiving company in mergers and de-mergers (subject to certain requirements). In business transfers, net interest expenses will not transfer to the receiving company.
The bill is currently being debated in Parliament, and has come under fire. The act is not yet in force.