Austria contemplates the introduction of interest barrier rules as of 1 January 2021. Such implementation is to occur earlier than originally expected (i.e. 1 January 2024) due to the European Commission’s view that Austria is obliged to introduce interest barrier rules in light of the EC BEPS Directive at an earlier date.
The interest barrier rules intend to avoid excessive tax-deductible interest expenses on the level of entities resident in a high-tax country which are highly leveraged. The interest barrier rules restrict the tax deductibility of net interest expense (corresponding to the surplus of interest expense over interest revenues) subject to the amount of the EBITDA of the entity. This leads to the effect that the higher the entity’s value added, the higher the potential for tax-deductible net interest expense.
Entities subject to the interest barrier restrictions
The interest barrier rules encompass Austrian tax resident corporations (including inter alia stock corporations, limited liability companies as well as private foundations) as well as non-Austrian resident entities with an Austrian permanent establishment. With regard to the latter, the restrictions of the new interest barrier rules will only apply to income of the Austrian permanent establishment.
Definition of interest for purposes of the interest barrier rules
The new interest barrier rules provide for a rather wide definition of the term "interest" and include any remuneration for debt capital including any payments for raising debt as well as any other remuneration which is – from an economic perspective –comparable to interest. As a result, costs of procuring money as well as financing costs in finance leasing models are also targeted.
The restrictions of the interest barrier rules only target the surplus of interest expense of interest income. Thus, tax deductibility will only be limited in those years in which an entity’s interest expense exceed interest revenue. For that purposes only those interest expenses shall be taken into account which are not subject to any other restrictions under Austrian tax law.
Exceptions
The Austrian rules implementing an interest barrier restriction provide for several exceptions which will ultimately reduce the number of potential entities for which such rules may actually be relevant. These exemptions can be summarised as follows:
- Stand-alone entity: Interest barrier rules do not apply to stand-alone entities. A stand-alone entity is described as an entity which (i) is not fully incorporated into consolidated financial statements of a group, (ii) does not have any affiliated companies (up as well as down the chain of entities) and (iii) does not have a non-Austrian permanent establishment.
- Tax-exempt amount of EUR 3m: Interest barrier rules do not apply in scenarios where the net interest expense is below an amount of EUR 3m. Such net interest expense is fully tax-deductible irrespective of the amount of the entity’s EBITDA.
- Escape clause in light of equity ratio: Net interest expense further remains tax-deductible in case the entity’s equity ratio is higher or at least equal to the equity ratio of the entire group. For simplicity reasons the tax-deductibility will not be restricted if the entity’s equity ratio falls short compared to the group’s ratio by just 2 bps at max. The draft Austrian legislation further contains a number of rules reg. the technical details of implementing such equity ratio comparison.
- Grandfathering rule: Interest expenses arising from contracts concluded prior to 17 June 2016 will not be affected by the interest barrier rules. Such grandfathering exemption is, however, temporary and may finally be applied in the course of the tax assessment for 2025.
The relevant EBITDA
The tax-deductibility of net interest expense shall be limited to an amount equal to 30% of the EBITDA. The basis for determining such EBITDA is the sum of taxable income of the entity (prior to applying the interest barrier rules). This amount is to be reduced by taxable write-up and increased by depreciations as well as net interest expense. Tax-exempt income (e.g. tax-exempt dividends) does not lead to an increase of such EBITDA.
In case the annual net interest expense exceeds 30% of the so determined EBITDA, i.e. the entire amount of net interest expense is not tax-deductible, the remainder can be carried forward in further years on an unlimited basis. Contrary, if 30% of the EBITDA exceeds net interest expense, that part of the EBITDA which is still available for a tax-deductibility can be carried forward within the next 5 years (at most). The carrying forward of non-deductible net interest expense as well as non-utilized EBITDA is subject to an application to be filed by the taxpayer.
Interest barrier rules and tax groups
The draft legislation also provides for special rules governing tax groups. In this respect it has to be emphasized that the interest barrier restrictions only apply on the level of the top-tier group entity (and not on the level of the individual group members). As a result, the amount of net interest expense is to be determined for the entire tax group by way of consolidating interest expenses as well as interest revenues of each group member and the top-tier group company. For that purpose, the income of the top-tier company, each Austrian resident group members as well as of Austrian permanent establishments of foreign group members are to be taken into account.
The amount of net interest expense for the entire tax group has to be put into comparison with the EBITDA of the entire group. To the extent net interest expense does not exceed 30% of the tax group’s EBITDA, the amount of net interest expense is tax deductible. Any parts of net interest expense which are non-deductible as well as any non-utilised EBITA can equally be carried forward on the level of the top tier group company. It must be noted that pursuant to draft legislation the tax exemption amount of EUR 3m is only available once per group (and not per group member).
Additionally, the escape clause for the equity ratio comparison applies to tax groups. For that purpose the equity ratio of the eligible group entities (as defined above) is to be determined and to be compared with the equity ratio of the entire group.
Speaking of tax groups, in particular considering Austrian capital maintenance rules, the introduction of interest barrier rules may necessitate an adaption/amendment of existing tax group agreements to adequately accommodate these rules and their effect on the tax position of the entire group.
Lookout
The new interest barrier rules are to come into force on 1 Jan 2021 and shall apply for fiscal years starting after 31 Dec 2020. It is to be expected that the Austrian Parliament will adopt these rules within the next few weeks. Additionally, it has been pronounced that the Austrian Ministry of Finance will issue an ordinance dealing with details on the new rules’ implementation. As a result, corporate taxpayers are strongly advised to analyse potential effects of the introduction of the interest barrier rules as soon as possible. In particular in scenarios where there is a tax group in place, these new rules may give rise to the necessity to adapt existing tax group agreements.
