Finance Act 2021 introduced new Interest Limitation Rules (ILR) in Ireland under the EU’s Anti-Tax Avoidance Directive (ATAD). These rules are effective for accounting periods commencing on or after 1 January 2022.
What are these new Interest Limitation Rules?
The aim of the ILR is to limit base erosion via excessive interest deductions.
The ILR achieves this by limiting the maximum annual corporation tax deduction available for net borrowing costs (net of taxable interest income and deductible interest expense) to 30% of EBITDA (earnings before interest, tax, depreciation and amortisation) or €3 million, whichever is higher.
The ILR applies to interest on all forms of debt as well as to other amounts that are economically equivalent to interest (including but not limited to, discounts, the finance element of finance lease payments and S247 interest claimed as group relief). It also applies to other expenses incurred directly in connection with the raising of finance (including guarantees, arrangement and commitment fees) which could be substituted for interest.
Who is impacted by Interest Limitation Rules?
ILR applies to all corporate taxpayers. However, there are certain exemptions to the ILR.
Corporate taxpayers may operate the interest restriction on a single entity or local group basis – determining the interest restriction at the level of a local group of companies (an “interest group”).
Are there any exemptions available for Interest Limitation Rules?
There are a number of exceptions to the ILR under current legislation, including:
- De minimis exemption where the Irish taxpayer’s net interest expenses are less than €3 million;
- Standalone companies, being companies that have no associated enterprises or permanent establishments outside Ireland;
- Interest related to long-term Public infrastructure projects; and
- Interest on legacy debt, in place prior to 17 June 2016 and unmodified.
What happens to the interest amount disallowed in an accounting period – is it lost?
Where a relevant entity incurs a disallowable amount, and the interest limitation applies, that amount is carried forward (referred to as “deemed borrowing costs”) to succeeding accounting periods.
In addition, the disallowable amount can be reduced by the amount of total spare capacity, made up of “interest spare capacity” (where taxable interest equivalent exceeds deductible interest equivalent) and “limitation spare capacity” (where exceeding borrowing costs is less than the allowable amount) carried forward from prior accounting periods. A relevant entity can carry forward its total spare capacity to later accounting periods for up to five years from the end of the accounting period in which the amounts have arisen.
What happens if a relevant entity underpays its preliminary tax for FY 2022 due to ILR?
Where there is an underpayment of preliminary tax for FY 2022 caused by the ILR, a top-up payment can be made up to six months after the end of the accounting period, i.e. by 23 June 2023. Where this top-up payment brings the total preliminary tax paid for an accounting period up to at least 90% of the final liability for the period, then no interest will arise on the underpayment.
The ILR are highly complex. It is important to consider these complex rules in advance of 23 June 2023 (if the company made a preliminary tax payment based on estimated profits for FY 2022) or of filing your company’s FY22 corporation tax return, to provide sufficient time to assess the impact on your business, and to identify any opportunities to minimise the impact of the restrictions and make appropriate elections.
We would be happy to carry out a review of your group’s financing structure and financing costs to understand the impact of the rules on your business and mitigate the impact of significant restrictions.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below: