Survey tax deductibility of interest payments - Freshfields

Survey on the tax deductibility
of interest payments
November 2012
Freshfields Bruckhaus Deringer llp

Survey on the tax deductibility of interest payments
Please note: This survey will only provide for a very basic high-level overview of the most relevant rules regarding the tax deductibility
of interest payments in the countries mentioned below. For more detailed information we recommend that you contact one of our local tax partners
whose contacts are listed below.
Austria Belgium France Germany Italy
Relevant
provisions
General thin cap test:
Based on administrative
practice/court decisions,
3:1 debt-to-equity ratio
as guideline.
Related Party Provisions:
Special provisions re interest
payments to related enterprises/
controlling shareholders
No interest deduction in case of
certain scenarios of debt-financed
acquisitions of shares.
Thin cap rules:
No deduction of interest paid to
lenders resident in tax havens or
from same group as the borrower
to the extent 5:1 debt-to-equity
ratio is exceeded.
Thin cap rules. Special provisions
re interest payments to related (or
deemed related) entities (Related
Party Provisions): No interest
deduction insofar as yearly interest
payments exceed the higher of
• related party debt to net equity
ratio of 1.5 to 1,
• 25 per cent of the tax EBITDA,
• interest received from
related parties.
Interest non-deductible can be
carried forward to subsequent
years (subject to a 5 per cent
yearly discount).
Loans/advances extended by
non-related party lenders treated
as ‘deemed related party’ loans
where guarantees/securities have
been granted to the lenders by an
entity related to the borrower.
‘Maximum allowed interest rates’
for shareholder loans.
Interest barrier rule:
Full deduction up to company’s
interest income; exceeding interest
only deductible up to 30 per cent of
tax EBITDA.
Non-deductible interest may be
carried forward indefinitely.
‘Unused’ tax EBITDA can be used
in the following 5 years.
Interest barrier rule:
Full deduction up to company’s
interest income; exceeding interest
only deductible up to 30 per cent of
the tax EBITDA.
Non-deductible interest and
‘unused’ tax EBITDA can be
carried forward indefinitely (can
also be used by other companies
within a tax group; possibility of
a ‘virtual tax group’ with foreign
subsidiaries).
Prior: Other rules limiting the
deduction of interest expenses
(eg transfer pricing, special rules
on bonds).
Freshfields Bruckhaus Deringer llp
Survey on the tax deductibility of interest payments
November 2012
1

Austria Belgium France Germany Italy
Additional anti debt
pushdown rules:
National interest deduction
regime
In tax group contexts and outside
tax groups basically applicable if
decision taking/control
re-acquired company is exercised
outside France.
National deduction allowed in
respect of cash equity injections/
profit retentions.
Special provisions re interest
payments derived by lenders in
certain non-cooperative States.
Personal
scope of
application
No personal exceptions.
Exceptions only for certain
leasing/factoring companies/
companies developing PPP projects.
Exceptions only for financial
institutions and groups that
are consolidated for tax/
accounting purposes.
No personal exceptions.
Exceptions for banks/insurances/
other finance companies, which
are subject to a different regime for
the deduction of interest expenses.
Exceptions No specific exceptions. Bonds/similar securities issued via
public emissions and loans granted
by credit institutions, insurance
companies etc are excluded from
thin cap rules.
Certain exceptions re thin
capitalisation rules for certain
‘deemed related party’ loans.
Certain exceptions re anti debt
push down rules for non-tax
groups if the following conditions
are met:
• Loans do not relate to
acquisition of shares, or
• acquiring company has lower
debt-equity ratio than the group
to which it belongs, or
Basically three exceptions:
• Interest expenses do not exceed
EUR3m per year.
• Relevant business is not part of
a group (Group Exception).
• Taxpayer can prove – if he is
part of a group – that equity
ratio is not more than 2 per cent
lower than equity ratio of the
group (Escape Clause).
No application of interest barrier
rule to interest capitalised on
the cost of assets and to interest
expenses arising in a zero-balance
cash pooling.
• total value of acquired shares is
less than EUR1m.
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Survey on the tax deductibility of interest payments
November 2012

Austria Belgium France Germany Italy
In place since Related Party Provision: Since 2011 No recent changes. Thin cap rules: Since 2007.
New anti debt push down rules
for non-tax groups: Introduced in
2012 with retroactive effect back
to 2004.
Since 2008. Interest barrier rule: Since 2008.
National interest deduction rules:
Since 2011.
Consequences
/other
relevant
issues
Some established debt-push-down
structures no longer usable, but
structuring alternatives available.
Only limited possibilities for debtpush
down structures.
Not yet enacted: Provisions re
companies subject to CIT, should
cap the deduction of net financial
charges paid to both related and
non related companies Rules not
applicable if total amount of net
financial charges is less than
EUR3M.
Interest limitation rule especially
relevant for Holding companies
(as they have a low tax EBITDA);
Establishment of fiscal unity might
enable further interest deduction
at holding level (as parent company
and dominated company are
considered as one business).
Debt-push-down structures might
be challenged by fiscal authorities.
Risk: Administrative practice in
recent past to disallow certain
debt-push down structures.
Freshfields Bruckhaus Deringer llp
Survey on the tax deductibility of interest payments
November 2012
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Luxembourg The Netherlands Spain UK US
Relevant
provisions
General thin cap test:
85:15 debt-to-equity ratio
in relation to funding of
participations qualifying for the
participation exemption, no legal
provision, but established by
fiscal authorities.
Thin cap rules:
In principle 3:1 debt-to-equity ratio;
relevant only to the extent the
interest amount exceeds
EUR500,000; loans payable and
loans receivable are netted in
calculating the debt-to-equity ratio;
deduction restriction is capped at
the net interest payable to related
parties). Expected to be abolished
per 1 January 2013.
Anti Base Erosion Rule:
Disallows deductions for
interest paid to a related person
in connection with a profit
distribution, a capital contribution
or the acquisition of shares
resulting in the target becoming a
related party.
Low Interest Bearing Loan Rule:
No interest deduction for
interest paid to a related entity
if underlying loan has no fixed
term/a term of more than 10 years
and the interest is lower than at
arm’s length terms.
Interest barrier rule:
Full deduction of net financial
expenses (interest expenses
exceeding interest income of the
year) only up to 30 per cent of the
year’s operating profit (calculated
by reference to Spanish GAAP but
with certain tax adjustments).
Non-deductible net financial
expenses may be used in the
following 18 years. ‘Unused’
operating profit can be used in
the following 5 years.
This rule captures both external
debt and intra-group debt which
is not previously captured (and
treated as non-deductible) by the
special rules featured below.
Intra-Group Debt Limitation:
Non-deductibility of any interest
due on any type of debt incurred
with group companies resulting
(i) from intra-group sales of equity
interest in other group companies,
or (ii) in equity investments in
group companies.
Intra-group debt is also subject
to Spanish transfer pricing
limitations (ie interest due to be
at arm’s length).
Thin cap rules:
No fixed debt-to-equity ratio;
instead analysis if third party
would also have granted
comparable amount of debt.
Worldwide debt cap (WWDC):
In a worldwide group of
companies with one or more
75 per cent+ owned UK
subsidiaries, the aggregate of net
financing expenses of UK members
must not exceed the total gross
external financing expense of
the worldwide group.
Equity features:
Restrictions for debt with certain
equity-like features, such as results
dependent interest, or debt stapled
to equity instruments.
Interest on debt funding foreign
investment fully deductible, but
is (at least partly) allocated against
foreign source income for purposes
of determining how much foreign
tax the borrower can credit against
its US tax liability.
Earnings stripping rule: Interest
owed to or guaranteed by related
foreign persons not deductible
to the extent debtor’s annual net
interest expense exceeds half of
its EBITDA.
Cash payment requirement:
No deduction for interest to related
foreign persons until interest is
paid in cash.
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Survey on the tax deductibility of interest payments
November 2012

Luxembourg The Netherlands Spain UK US
Overleveraged Acquisition
Holdings Rule:
Effectively limits set-off of
interest costs on funding for the
acquisition of Netherlands target
companies against the profits of
such targets if amount of debt is
considered excessive.
Targeted anti-avoidance rule:
Non-deductibility of interest where
a company is party to a loan with
a main purpose of securing a UK
tax advantage.
Participation Debt Interest
Restriction:
Restricted interest deduction of
interest on debt used to finance
shareholdings qualifying for the
participation exemption.
Relevant only to the extent
qualifying participations do not
exceed tax equity. Relevant only
to the extent the ‘tainted’ interest
amount exceeds EUR750,000.
Personal
scope of
application
All companies resident in
Luxembourg for Luxembourg
corporate income tax purposes.
No personal exceptions.
Interest barrier rule:
No application to
• credit entities and insurance
companies
• all entities in respect to the tax
period of their extinction (but
certain exceptions)
WWDC:
Exceptions for Financial services
groups. Optional disregard of
treasury companies. Relaxations
for securitisation companies,
llp’s & CIS’s.
Earnings stripping rule only
affects corporations.
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Survey on the tax deductibility of interest payments
November 2012
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Luxembourg The Netherlands Spain UK US
Exceptions No exceptions. Overleveraged Acquisition
Holdings Rule:
No excessive debt financing if debt
does not exceed 60 per cent of the
acquisition price.
Participation Debt Interest
Restriction:
Participations are not taken
into account if they were
acquired as expansion of the
operational activities of the group
and are not funded with any form
of ‘double-dip’ debt.
Interest barrier rule:
No application if net
financial expenses do not
exceed EUR1m per year.
No exceptions.
Earnings stripping rule not
applicable unless debt/equity
ratio of debtor’s affiliated group
exceeds 1.5/1.0.
In place since No recent changes. Thin cap rules: May be abolished as
of 1 January 2013.
Overleveraged Acquisition Holdings
Rule: Since 2012.
Participation Debt Interest
Restriction: As of 1 January 2013.
Interest barrier rules and special
intra-group debt rules (not transfer
pricing): Since 2012.
WWDC: Since 2010.
No recent changes in relation to
the other rules.
No recent changes. Discussion
about adopting a territorial system
(which would deny deductions for
interest related to untaxed foreign
income) or deferral of deductions
for interest until related foreign
income is repatriated.
Consequences
/other
relevant
issues
New possibilities to fund
Netherlands companies with
group debt as of 1 January 2013
due to intended abolishment of
thin cap rules.
Use of non-resident entities and
alternative financing structures
might attenuate the effects of the
new interest barrier rule.
Careful structuring of shareholder
loans can mitigate disallowances
under the WWDC rules.
Allocating interest to determine
the foreign tax credit limitation
can have the same economic effect
as denial of the deduction.
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Survey on the tax deductibility of interest payments
November 2012

Our contacts
UK
Peter Clements
London
T +44 20 7785 5750
E peter.clements@
freshfields.com
Netherlands
Machiel Lambooji
Amsterdam
T +31 20 485 7608
E machiel.lambooij@
freshfields.com
Italy
Vittorio Salvadori
Milan
T +39 02 625 30454
E vittorio.salvadori@
freshfields.com
France
Vincent Daniel-Mayeur
Paris
T +33 1 44 56 33 80
E vincent.daniel-mayeur@
freshfields.com
Austria
Claus Staringer
Vienna
T +43 1 515 15 117
E claus.staringer@
freshfields.com
Germany
Georg Roderburg
Düsseldorf
T +49 211 49 79 346
E georg.roderburg@
freshfields.com
Spain
Miguel Lorán
Madrid and Barcelona
T +34 91 700 3770
E miguel.loran@
freshfields.com
Belgium
Axel Haelterman
Brussels
T +32 2 504 7260
E axel.haelterman@
freshfields.com
US
Claude Stansbury
Washington
T +1 202 777 4507
E claude.stansbury@
freshfields.com
Freshfields Bruckhaus Deringer llp
Survey on the tax deductibility of interest payments
November 2012
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