The Interest Limitation Rule, now also in Austria
As part of the new COVID-19 Tax Measures Act, an interest limitation rule has been introduced by the new § 12a of the Austrian Corporate Income Tax Act (“CITA”) in order to fulfil the requirements of Art. 4 of the EU Anti-Tax-Avoidance Directive (Council Directive (EU) 2016/1164; “ATAD”). The rule aims at a limitation of the deductibility of borrowing costs depending on the amount of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA) if, and only if, the debt leverage of a group is higher in Austria than the group’s average. The new rule is applicable for financial years beginning after 2020.
The interest limitation rule was not introduced in Austria as from 2019, as would generally have been foreseen in the ATAD, because the Austrian Ministry of Finance (along with certain tax practitioners and scholars) thought Austria could rely on the extended implementation deadline until 2024, as foreseen in the ATAD, since the extension required an anti-BEPS measure equally effective as the ATAD’s interest limitation rule; Austria’s interest limitation provision in § 12 (1) (9) and (10) Austrian Corporate Income Tax Act was considered equally effective. However, the European Commission did not share this view and had already initiated infringement proceedings against Austria because of the non-implementation so far. With the introduction of the new interest limitation rule, Austria now follows the Commission’s requests.
The interest limitation rule is intended to deny the deduction of borrowing costs above a certain level at least temporarily. The aim of the rule is to prevent tax advantages from using particularly high debt financing at the level of certain group entities.
Basic System of the New Interest Limitation Rule
§ 12a (1) CITA provides that the interest surplus in a financial year shall, in principle, only be deductible up to 30% of the tax EBITDA of such financial year. Thus, two central reference values are relevant: the interest surplus and the tax EBITDA:
- An interest surplus is the excess of tax deductible borrowing costs over tax effective interest income. All payments for borrowed capital, including all costs for obtaining the funds, as well as other payments that are economically equivalent, qualify as borrowing costs. § 12a (3) CITA defines an independent, very comprehensive concept of interest (borrowing costs) for the purposes of the interest limitation rule. This also includes, for example, the costs for obtaining funds.
- The tax EBITDA is determined as follows:
Total amount of taxable income before application of the interest limitation rule
+ net borrowing costs
+/- tax-adjusted amounts for exceeding borrowing costs as well as tax-adjusted amounts for depreciation and amortisation
= tax EBITDA
As a result, the amount of deductible borrowing costs is directly related to the corporation's taxable result: the lower the taxable result, the lower the amount of tax deductible borrowing costs.
The new provision applies to all corporations with unlimited and limited tax liability in Austria, to the latter in relation to their permanent establishments located in Austria.
Exceptions to the Interest Limitation Rule
Due to the following exceptions, the scope of the new interest limitation rule is significantly limited:
- Allowance of € 3 million: Up to € 3 million per tax period, an interest surplus is fully deductible. This is an allowance rather than an exempt limit, meaning that € 3 million remain exempt from the limitation rule even if the interest surplus exceeds € 3 million. However, in case of a tax group, this allowance applies for the entire tax group, not per group member.
- Standalone clause: The interest limitation rule is not applicable if the corporation is a standalone entity. This is fulfilled if the entity is not fully included in consolidated financial statements, does not have an affiliated company and does not maintain a foreign permanent establishment.
- Equity-escape clause: The interest surplus is fully deductible if the respective taxpayer can demonstrate that the ratio of its equity over its total assets is equal to, or higher than, the equivalent ratio of the corporate group it belongs to (an up to two percentage points lower ratio than the group is permitted). For applying this clause, it is required to compare the equity ratio of the entity (or the tax group) with the equity ratio of the consolidated group of which it is part, i.e. the entity must actually be included for purposes of the group’s consolidated financial statements.
- Contracts concluded before June 17, 2016: borrowing costs from contracts concluded before June 17, 2016 are not considered for purposes of applying the interest limitation rule until 2025.
Interest- and EBITDA-Carry Forward
Any interest surplus that is not tax-deductible in one year can be carried forward to the subsequent financial years without restriction (interest carry forward). Therefore, non-deductible borrowing costs are not lost forever, but might be utilized for tax purposes for an unlimited period in later years under the general conditions.
In addition, there is also a time-limited carry forward of EBITDA. Such an EBITDA carry forward arises to the extent 30% of the tax EBITDA of a financial year exceeds the interest surplus including any interest carried forward. This excess can be carried forward to the following five financial years
Effects on Tax Groups
§ 12a (7) CITA governs the effects of the interest limitation rule on tax groups. It specifies that the interest limitation rule is to be considered exclusively at the level of the group parent as part of the determination of the combined result of the tax group. Therefore, the interest limitation rule does not affect the individual group members, but rather the group as a whole. This means, inter alia, that the tax allowance of € 3 million is only available once for the entire tax group. Furthermore, the interest limitation rule is modified insofar as a group interest surplus and a group EBITDA must be determined and the group interest surplus is only deductible to the extent of 30% of the group’s EBITDA. The group interest surplus is the sum of the net interest expense of the group parent and of the group members with unlimited and limited tax liability from domestic permanent establishments. This results in a neutralization of intra-group borrowing costs and interest income and an aggregation of the results of the individual group members. Group EBITDA consists of the sum of the total amounts of income of the group parent and the group members with unlimited tax liability as well as the income of group members with limited tax liability from Austrian permanent establishments, neutralized by tax-adjustments for depreciation and amortisation as well as the group interest surplus. The carry forward rules for the interest surplus and EBITDA also apply to tax groups.
Please note: This blog merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the blog.