The aim of the Proposed Directive is to allow a notional interest deduction and to limit the tax deductibility of exceeding borrowing costs.
The Proposed Directive if adopted should be implemented into domestic law by 31 December 2023 and apply from 1 January 2024 (unless a domestic notional interest deduction is already available in the Member State).
Which entities are in the scope of the Proposed Directive?
The Proposed Directive applies to all taxpayers (including permanent establishments) subject to corporate income tax in a Member State of the European Union.
Financial undertakings as defined by EU directives or regulations are however excluded from the scope of the Proposed Directive, such as:
- AIF managed by an AIFM or supervised under national law
- AIFM
- UCITS and their management companies
- investment firms
- credit institutions
- securitisation special purposes entities (SSPE)
- insurance and reinsurance undertakings
- central counterparties
- central securities depositories
- payment and/or electronic money institutions
- crowdfunding and/or crypto-asset service providers
New tax deductible allowance on equity
Each year, a tax deductible allowance on equity is granted to the taxpayer for ten consecutive tax periods.
The allowance is equal to i) the difference between the net equity amount at the end of the tax period and at the end of the previous tax period multiplied by ii) the 10-year risk-free interest rate for the relevant currency plus a risk premium of currently 1% (increased to 1.5% if the taxpayer is an SME). The net equity is defined as the difference between the equity of a taxpayer and the sum of the tax value of the taxpayer’s participation in the capital of associated enterprises and the taxpayer’s own shares.
The amount of the risk premium may be amended under conditions by the European Commission.
The allowance is however limited to 30% of the taxpayer’s EBITDA. The amount of the allowance which exceeds the 30% EBITDA may be carried forward for the five following tax periods.
Furthermore, if the taxable profits of the taxpayer are lower than the allowance on equity for a tax period, the surplus of the allowance remains tax deductible for the following tax periods.
If the taxpayer benefits from a tax allowance, but reduces its net equity subsequently, a correlative adjustment of the tax advantage deriving from the allowance will be made, unless the net equity decrease is due to accounting losses or a legal obligation.
The Proposed Directive provides for several exceptions to the allowance aiming at preventing any abuses. The allowance is in principle refused where an equity increase derives from loans granted between associated entreprises or a transfer of shares/business between associated entreprises. Specific restrictions also apply to business restructurings and contributions in kind.
With additional limit to interest deduction
Exceeding borrowing costs as defined under Directive 2016/1164 (ATAD 1) - ie deductible borrowing costs exceeding the amount of taxable interest plus economically equivalent taxable income - are deductible up to 85% of their amount. In other words, 15% of the exceeding borrowing costs will not be tax deductible. This restriction applies to exceeding borrowing costs only, meaning that pure financing companies in a back-to-back situation with no exceeding borrowing costs should not be impacted. Under the Proposed Directive, this limitation applies in addition to the ones already applicable under ATAD 1 (ia 30% tax EBITDA). The difference between the deductible amounts under the proposed rules and ATAD 1 should be carried forward or back in line with ATAD 1 rules.
Next steps
The Proposed Directive, which requires unanimity for adoption, is currently open for feedback from citizens and stakeholders. Taxpayers having exceeding borrowing costs should however review their financing to evaluate the impact of the proposed interest limitation rules.
Patrick Mischo
Partner
Tel +352 44 44 5 5332
patrick.mischo@allenovery.com
Jean Schaffner
Partner
Tel +352 44 44 5 5613
jean.schaffner@allenovery.com
Sophie Balliet
Counsel
Tel +352 44 44 5 5221
sophie.balliet@allenovery.com
Franz Kerger
Counsel
Tel +352 44 44 5 5149
franz.kerger@allenovery.com
Guilhèm Becvort
Counsel
Tel +352 44 44 5 5140
guilhem.becvort@allenovery.com
Johanna Tschurtschenthaler
Counsel
Tel +352 44 44 5 5254
johanna.tschurtschenthaler@allenovery.com
Olympe Alexandre
PSL-Senior Associate
Tel +352 44 44 5 5170
olympe.alexandre@allenovery.com
Zofia White
Senior Associate
Tel +352 44 44 5 5249
zofia.white@allenovery.com
Samara Hiscock
Senior Associate
Tel +352 44 44 5 5345
Samara.hiscock@allenovery.com
Stéphanie Yiolitou
Senior Associate
Tel +352 44 44 5 5216
Stephanie.yiolitou@allenovery.com
