Austria is considering introducing rules for interest rate barriers from January 1, 2021. Such an implementation should take place earlier than originally expected (ie January 1, 2024), as the European Commission is of the opinion that Austria is obliged to introduce rules for interest rate barriers in Light of the EG-BEPS to introduce guideline at an earlier date.
The interest barrier rules are aimed at avoiding excessive tax deductible interest expense at the level of high tax country resident companies that have a high level of indebtedness. The interest barrier rules limit the tax deductibility of the net interest expense (corresponding to the excess of the interest expense over the interest income) depending on the company’s EBITDA. As a result, the potential for tax-deductible net interest expenses is higher, the higher the company’s added value.
Companies subject to the restrictions of the interest rate barrier
The interest barrier rules include tax-resident companies domiciled in Austria (including, among others, stock corporations, limited liability companies and private foundations) as well as non-Austrian companies with an Austrian permanent establishment. With regard to the latter, the restrictions of the new interest barrier rules only apply to income from the Austrian permanent establishment.
Definition of interest for the purposes of the interest barrier rules
The new rules on interest barriers provide a fairly broad definition of the term “interest” and include any remuneration for borrowed capital, including any payments for borrowing, as well as other remuneration which, from an economic point of view, is comparable to interest. As a result, the cost of raising money and financing costs are also taken into account in finance leasing models.
The restrictions of the interest barrier rules only target the excess of the interest paid on the interest income. Therefore, the tax deductibility is limited only in the years in which the interest expense of a company exceeds the interest income. For this purpose, only those interest expenses are taken into account for which no further restrictions apply under Austrian tax law.
The Austrian regulations implementing a restriction on the interest rate barrier provide for several exceptions that ultimately reduce the number of potential companies for which such regulations may actually be relevant. These exceptions can be summarized as follows:
- Standalone Business: The interest rate barrier rules do not apply to standalone businesses. An independent company is described as a company that (i) is not fully included in the consolidated financial statements of a group, (ii) has no affiliated companies (both along and along the corporate chain) and (iii) has no non-Austrian permanent establishment.
- Tax-exempt amount of EUR 3 million: Interest barrier rules do not apply in scenarios where the net interest expense is less than EUR 3 million. This net interest expense is fully tax deductible regardless of the company’s EBITDA.
- Escape clause with regard to the equity ratio: The net interest expense remains tax-deductible if the equity ratio of the company is higher or at least equal to the equity ratio of the entire group. For the sake of simplicity, the tax deductibility is not restricted if the equity ratio of the company is only 2 basis points at a max. The draft of the Austrian legislation also contains a number of rules reg. the technical details of performing such a comparison of the equity ratio.
- Grandfathering rule: Interest expenses from contracts concluded before June 17, 2016 are not affected by the rules for interest barriers. However, such exemption from grandfather is temporary and can eventually be applied as part of the 2025 tax assessment.
The relevant EBITDA
The tax deductibility of the net interest expense is limited to 30% of EBITDA. The basis for determining such EBITDA is the sum of the company’s taxable income (before applying the interest rate barrier rules). This amount is to be reduced by taxable depreciation and increased by depreciation and net interest expenses. Tax-exempt income (e.g. tax-exempt dividends) does not increase this EBITDA.
If the annual net interest expense exceeds 30% of the EBITDA determined in this way, ie the total net interest expense is not tax-deductible, the remaining amount can be carried forward indefinitely in further years. If, on the other hand, 30% of EBITDA exceeds net interest expense, the portion of EBITDA that is still tax-deductible can (at most) be carried forward within the next 5 years. The transfer of the non-deductible net interest expense and the unused EBITDA is subject to an application from the taxpayer.
Rules for interest barriers and tax groups
The draft law also provides special rules for tax groups. In this context, it should be emphasized that the restrictions on the interest rate barrier only apply at the level of the top group unit (and not at the level of the individual group members). As a result, the amount of the net interest expense for the entire tax group is to be determined by consolidating the interest expenses and the interest income of each group member and the ultimate group company. For this purpose, the income of the top company, each group member resident in Austria and the Austrian permanent establishments of foreign group members must be taken into account.
The amount of the net interest expense for the entire tax group is to be compared with the EBITDA of the entire group. If the net interest expense does not exceed 30% of the tax group’s EBITDA, the net interest expense is tax deductible. Non-deductible parts of the net interest expense and unused EBITA can also be carried forward at the level of the top tier group company. It should be noted that the tax exemption amount of EUR 3 million according to the draft law is only available once per group (and not per group member).
In addition, the escape clause applies to the equity comparison for tax groups. For this purpose, the equity ratio of the approved group companies (as defined above) must be determined and compared with the equity ratio of the entire group.
With regard to tax groups, in particular taking into account the Austrian capital preservation regulations, the introduction of interest barrier regulations may make it necessary to adapt / amend existing tax group agreements in order to adequately take these regulations and their effects on the tax position of the entire group into account.
The new rules for interest rate barriers come into effect on January 1, 2021 and apply to fiscal years beginning after December 31, 2020. It is to be expected that the Austrian parliament will adopt these rules in the next few weeks. In addition, it was stated that the Austrian Ministry of Finance will issue an ordinance regulating the details of how the new regulations will be implemented. For this reason, corporate taxpayers are strongly advised to analyze the possible impact of the introduction of the interest barrier rules as soon as possible. Especially in scenarios in which there is a tax group, these new rules can lead to existing tax group agreements having to be adapted.