24.1.2018

More Restrictions to Deductibility of Interest Costs—Real Estate Business Brought within Scope of Restrictions

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A Government Bill proposing new restrictions to the tax deductibility of interest costs was published on Friday, 19 January 2018. The majority of the amendments are based on the provisions of the EU’s directive on the prevention of tax avoidance and are meant to enter into force from the start of 2019.

The tax deductibility of interest expenses is currently restricted in the income taxation of entities, general partnerships and limited partnerships. The restriction only applies to interest payments between affiliated companies and is not applied, for example, to companies operating in the real estate or financial service industries.

The bill proposes expanding the restriction to the interest costs of loans from outside parties. Furthermore, the restriction’s scope of application would be expanded to also cover companies in the real estate and financial service industries. The amendment will likely have a significant impact on real estate and real estate investment companies.

According to the bill, the restriction provisions would still not apply to companies with net interest costs, i.e. with interest costs exceeding their interest income, that are no more than EUR 500,000 during the tax year.

Companies would continue to be allowed to deduct their interest costs in full up to the amount of interest income. The net interest costs could be deducted to the extent that they are no more than 25% of the ad-justed result of operations (i.e. the result of operations plus interest costs and deductible depreciations and amortisations and group contributions and less granted group contributions). Net interest costs exceeding this percentage would not be deductible. As a mitigation of the restriction to deductibility, companies would still be able to deduct net interest costs paid to outside parties up to three million euros regardless of the percentage limit.

According to the bill, the deductibility of interest costs would only be limited when the taxpayer is part of a group or is affiliated with another party or has a permanent establishment. This delineation seems prob-lematic from the perspective of the equal treatment of taxpayers.

The current restriction provision contains a balance sheet exemption rule. Under this rule, the restriction is not applied if the taxpayer can file a submission showing that its equity to total assets ratio is greater than or equal to the corresponding ratio of its adopted consolidated balance sheet. This provision has proved to be difficult to apply in practice, and the bill proposes that it be removed.