AUSTRIA - Interest limitation rule
Measures to combat tax avoidance practices have long been at the centre of political discussions at EU/OECD level. The EU directive ATAD ("Anti-Tax Avoidance Directive"), which has been adopted in the course of the negotiations, has already led to some action respectively changing tax regulations in member states of the EU/OECD. ATAD's primary objective is to implement a common minimum standard to combat tax avoidance practices. In addition to the provisions already transposed in national law (such as the Controlled Foreign Corporation rules, implemented in the course of the Annual Tax Act 2018 in § 10a KSTG), the planned measures include the implementation of a so-called interest limitation, which restricts the tax deductibility of interest on borrowed capital.
Interest limitation rule – general aspects
The most essential element of the "interest limitation rule" is to restrict the tax deductibility of "excessive borrowing costs". This is the excess of borrowing costs compared to the company's interest income. However, a restriction of tax deductibility should only occur if these "excessive borrowing costs" exceed a certain percentage of the company´s EBITDA (according to the Directive, 30% of the EBITDA of the same year), and if there is no exemption. As an alternative to the EBITDA rule, an exemption limit of up to EUR 3 million may also be applied.
Exemptions are foreseen by the Directive, for example, for financial services companies or in the context of the application of a so-called escape clause. The escape clause exception is based on the equity ratio of the individual taxpayer in relation to that of the entire Group. The guideline stipulates that there will be no restriction on the interest deduction if the equity ratio of the individual company is not lower than two percentage points of the equity ratio of the group. In addition, Member States may provide for exemptions for old loans completed before 17 June 2016 and for the financing of long-term public infrastructure projects.
Overall, the Directive allows for a certain flexibility and options with regard to the specific amount and the nature of individual exemptions and limits. Hence, despite a uniform minimum standard, the interest limitation could be interpreted and adopted in different ways in the individual Member States.
Implementation of the rule in Austria
According to the provisions of the EU, the interest limitation rule had to be implemented by 31 December 2018. An extension of this implementation deadline only exists for Member States which have already implemented equally effective measures to limit the tax deductibility of excessive interest on borrowed capital in national law. These Member States are granted an extension until 1 January 2024 to implement the provisions of the interest barrier in national law.
In this regard, Austria has expressed the opinion that the prevailing measures in Austria are equally effective, since interest payments to (1) a group member in a low-tax jurisdiction as well as (2) interest payments for externally financed intra-group acquisitions are not considered as tax-deductible expenses. Austria has therefore been of the opinion that the extended implementation deadline would be applicable.
However, the European Commission (EC) recently issued a statement which did not confirm the Austrian opinion. According to the EC’s statement of 7 December 2018, only Greece, France, Slovakia, Slovenia and Spain have equally effective measures that allow the new interest deduction restriction to be implemented into national law later than 31 December 2018. Austria would therefore have been obliged to implement the interest limitation rule into national law by that date.
Hence, the restrictions on interest deductibility by means of the interest limitation rule will have to be observed earlier than originally expected in Austria. Even though the "interest barrier" rule has not yet been implemented at present, it is advisable to evaluate the possible effects of the rule, to be able to react to the planned changes in time. Furthermore, such foreseeable developments should be taken into account for long-term decisions regarding the financing structure of new projects and investments.
Should you require assistance in evaluating the tax implications of a future interest limitations, please do not hesitate to contact BDO in Austria.