Survey on the tax deductibility of interest payments

Transcription

1 Survey on the tax deductibility of interest payments

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3 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. 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. 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). 1

4 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. 2

5 Austria Belgium France Germany Italy In place since Related Party Provision: Since 2011 No recent changes. Thin cap rules: Since New anti debt push down rules for non-tax groups: Introduced in 2012 with retroactive effect back to Since Since National interest deduction rules: Since 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. 3

6 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 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. 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. 4

7 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. 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. 5

8 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. 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 Overleveraged Acquisition Holdings Rule: Since Participation Debt Interest Restriction: As of 1 January Interest barrier rules and special intra-group debt rules (not transfer pricing): Since WWDC: Since 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. 6

9 Our contacts UK Peter Clements London T E peter.clements@ Netherlands Machiel Lambooji Amsterdam T E machiel.lambooij@ Italy Vittorio Salvadori Milan T E vittorio.salvadori@ France Vincent Daniel-Mayeur Paris T E vincent.daniel-mayeur@ Austria Claus Staringer Vienna T E claus.staringer@ Germany Georg Roderburg Düsseldorf T E georg.roderburg@ Spain Miguel Lorán Madrid and Barcelona T E miguel.loran@ Belgium Axel Haelterman Brussels T E axel.haelterman@ US Claude Stansbury Washington T E claude.stansbury@ 7