Problem detected: Multinational groups may finance group entities in high-tax jurisdictions through debt and arrange that these companies pay back interest to subsidiaries resident in low-tax jurisdictions.
Aim of the Directive: To introduce a general limit on the amount of interest that the taxpayer is entitled to deduct in a certain tax year.
Solution: To introduce an interest limitation rule, according to which net interest expenses will only be deductible up to 30 percent of the taxpayer’s EBITDA or up to an amount of EUR 1,000,000, whichever is higher. Interest that cannot be deducted (as well as EBITDA that is not fully absorbed under the main rule) can be carried forward to future years. Additional interest may be deductible under an escape rule, if the taxpayer’s equity/total assets ratio is equal to or better than the same ratio of the group to which it belongs (allowing for a 2% variation). However, the latter is subject to very strict conditions, including that the taxpayer can only make payments to associated enterprises up to 10% of the group’s total net interest expense. No further escape rules will be permitted e.g. for taxpayers that do not belong to a group (certain joint ventures or off-balance sheet entities). Financial institutions and insurance companies (“financial undertakings”) are excluded temporarily from the above rule.