20/09/2021

20/09/2021

Interest Limitation Rule (Anti-Tax Avoidance Directives )

Background

The European Commission has requested that Ireland transpose into Irish law the interest limitation rule (ILR) as required by the EU’s Anti-Tax Avoidance Directive (ATAD). Ireland contended that its current interest limitation rules are “equally effective” and notified derogation requests under EU law, which has not been granted by the European Commission.  

Interest Limitation Rule (ILR)

Article 4 of ATAD requires EU Member States to introduce a fixed ratio rule that links a company’s tax allowable interest deductions directly to its level of economic activity based on EBITDA (taxable earnings before deducting interest, depreciation, and amortisation). The intention is to limit interest deductions to a maximum of 30 percent of EBITDA.  

Permitted exemptions from ILR

Possible exemptions to the ILR that Member States are permitted to implement include:
  • De minimis exception – A minimum threshold of €3 million interest before ILR applies. If applied this would mean that the ILR would only apply to interest deducted in excess of €3 million. It is expected that the €3 million limit will be applied across a group as a whole
  • Standalone entities – Generally abuse of interest deductions takes place between companies within a corporate group, an exemption from the ILR is therefore permitted for stand alone entities
  • Legacy debt – Interest in relation to loans in place before 17 June 2016 can be ignored for the ILR
  • Public infrastructure projects – exceptions can apply here in certain circumstances
  • Financial Undertakings – Wide exceptions are provided for such entities
It is not clear at this time, as to what exemptions will be provided for in Irish legislation.  

Restricted Interest under ILR

Where interest is not deductible in the current tax period under the ILR, Member States may choose to grant taxpayers one of the following options:
  • carry forward indefinitely any interest not deductible; or
  • carry forward indefinitely and to carry back (for a maximum of 3 years) any interest not deductible; or
  • carry forward indefinitely any interest not deductible, as well as the carry forward (for a maximum of 5 years) of unused interest capacity
 

Current tax deductions for interest

The current regime governing tax deductions for interest in Ireland is complex, disjointed and restrictive. Interest deductions generally come within three headings, each with their own legislative rules. The interest headings are:
  • as a trading expense
  • as a charge on income
  • as a deduction against rental income
Each of the above headings have different rules, further complicating matters.  

Irish Legislation in relation to the ILR

The ILR will be transposed into Irish law in Finance Bill 2021, with the rules to take effect from 1 January 2022. If the ILR is included in Irish law without reviewing and streamlining the current complex legislation in relation to interest deduction, it will lead to unnecessary complexity in respect of the tax allowable interest deductions in Ireland and could make this country less attractive for foreign investment.  The simplification of interest deductibility rules needs to be made a priority. Irish business needs to have a clear understanding of how the ILR will affect them. We also need to know what approach will be taken by the Government regarding the permitted exemptions and reliefs for carry back and carry forward of interest deductions which are restricted by the ILR.   

HOW CAN WE HELP?

We are here to support you and your business in these unprecedented times. We would encourage you to reach out to us if you would like to discuss any of the matters referred to above. Equally feel free to call if you would like to discuss matters generally.  Please accept this communication as our interpretation of the subject matter. Always take tax advice specific to your fact pattern. You are encouraged to contact us if you are unclear or would like to discuss the content.