Draft law would tighten existing rules and introduce a “maximum interest barrier rule”
The German government on 30 August 2023 approved a draft of a business tax reform bill (“Growth Opportunity Act”), which includes a multitude of different tax measures. One of the most important proposals for foreign investors into Germany is the tightening of the interest deduction limitation rules, which would generally become effective as from 1 January 2024. Even though the draft law is still pending in the legislative process and must be approved by the upper and lower houses of parliament, this article discusses what businesses should consider in regard to the proposed changes to the interest deduction limitation rules, as well as the proposal to introduce a “maximum interest barrier rule,” to better understand any potential implications.
The current interest deduction limitation rules, which were introduced in 2008, are based on a general limitation of annual net interest expense to 30% of the EBITDA (earnings before interest, taxes, depreciation, and amortization) of a company. Excess interest expense can be carried forward indefinitely, and unused EBITDA capacity can be carried forward for five years. For purposes of the interest deduction limitation rules, a tax consolidated group qualifies as one company. Under the current rules, there are three exceptions to the general 30% EBITDA limitation:
In order to determine the arm’s length character of the interest expense, general transfer pricing rules based on the OECD transfer pricing guidelines apply.
The pending draft law proposes the following changes to the current interest deduction limitation rules:
The proposed changes to the interest deduction limitation rules would become effective for expenses in fiscal years that begin after the approval of the proposed law by the lower house and that do not end before 1 January 2024.
The proposed law also would introduce a maximum interest barrier rule in a newly introduced section 4l of the Income Tax Code.
Under the proposed rule, interest expense paid to certain related parties would become nondeductible if it exceeds a certain maximum interest rate (a base rate as provided in section 247 of the Civil Code plus a 2% margin). As the current base rate in section 247 of the Civil Code is 3.12%, this would result in a maximum rate of 5.12% (the base rate is updated by the German Federal Reserve every six months on 1 July and 1 January). Any changes to the floating maximum interest rate would apply for purposes of the maximum interest barrier rule one month after the change in the Civil Code. An exception would apply in two scenarios:
It has to be highlighted that the proposed maximum interest barrier rule also would apply to purely domestic transactions, even if both the lender and borrower are part of the same tax consolidated group.
The maximum interest barrier rule would apply for interest expense triggered after 31 December 2023.
The proposals in the draft law include important changes to the general interest deduction limitation rules and the introduction of a new “maximum interest barrier rule,” which might affect existing financing arangements without any grandfathering rules. Taxpayers should review their financing structures in this regard and prepare for a change of the rules. Even if the interest rates for intercompany loans are below the current maximum interest rate, the floating character of the maximum interest rate should be taken into account. If an escape is not available, it might be a prudent approach to consider this when determining intercompany interest rates with a German borrower.
It should be highlighted that the proposed rules are not final yet and still subject to approval in the legislative process. The outcome of the legislative process is uncertain, and the rules as described might be subject to change. Nevertheless, it is recommended to get familiar with the proposed changes and to follow any updates that might arise until the finalization of these rules.
|Diese Mandanteninformation enthält ausschließlich allgemeine Informationen, die nicht geeignet sind, den besonderen Umständen eines Einzelfalles gerecht zu werden. Sie hat nicht den Sinn, Grundlage für wirtschaftliche oder sonstige Entscheidungen jedweder Art zu sein. Sie stellt keine Beratung, Auskunft oder ein rechtsverbindliches Angebot dar und ist auch nicht geeignet, eine persönliche Beratung zu ersetzen. Sollte jemand Entscheidungen jedweder Art auf Inhalte dieser Mandanteninformation oder Teile davon stützen, handelt dieser ausschließlich auf eigenes Risiko. Deloitte GmbH übernimmt keinerlei Garantie oder Gewährleistung noch haftet sie in irgendeiner anderen Weise für den Inhalt dieser Mandanteninformation. Aus diesem Grunde empfehlen wir stets, eine persönliche Beratung einzuholen.
This client information exclusively contains general information not suitable for addressing the particular circumstances of any individual case. Its purpose is not to be used as a basis for commercial decisions or decisions of any other kind. This client information does neither constitute any advice nor any legally binding information or offer and shall not be deemed suitable for substituting personal advice under any circumstances. Should you base decisions of any kind on the contents of this client information or extracts therefrom, you act solely at your own risk. Deloitte GmbH will not assume any guarantee nor warranty and will not be liable in any other form for the content of this client information. Therefore, we always recommend to obtain personal advice.