Limitation of interest deduction


Within the so-called BEPS project, the European ATAD initiative, which sets out some rules against tax evasion practices, was created. An adjustment is in place between these rules to regulate excessive interest costs.       

In the Czech Republic, this will be an alternative to the provisions of § 25, (1) 1  w) of the Income Tax Law. However, unlike the current regulation in the Czech Republic, the ATAD directive does not only follow the financial costs from the related persons, but from the banks also. The ATAD works with so–called excessive borrowing costs after deducting the incomes from these operations.

Borrowing costs will not include only interest on loans, but also, for example, lease interest, capitalised interest, or some exchange rate differences on investments. The directive further stipulates that borrowing costs up to 30% EBITDA will be tax deductible. Member States are then set to a minimum threshold of 3 million EUR, where excessive borrowing costs will be tax deductible irrespective of the EBITDA calculation. However, it should be kept in mind that this is indeed the minimum threshold set for Member States. It is then up to the Member States to determine the threshold for the Member States. Representatives of the Ministry of Finance have already reported that, for example, this threshold will most likely be significantly reduced.In addition, it will be possible, for example, to provide that a portion of the borrowing costs that are not tax deductible may be used in subsequent years if the eligibility calculation is favourable. Similarly, if we do not use the limit of eligibility, which will not be used in the current year, we will be able to use it in the coming years. There is a whole range of options where Member States have room to manoeuvre. A large discussion, for example, leads to whether the aforementioned existing regulation in § 25 will exist concurrently with this rule, for example, for taxpayers that the new directive does not achieve, or the Czech Republic opts for another approach. However, with regard to the implementation obligation until the 31st of December 2018, I expect the first legislative proposals in the near future.

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