What are interest limitation rules, and what do they mean?
The EU Anti-Tax Avoidance Directive (“ATAD”) requires European Union Member States to implement a fixed ratio rule. This limits the ability of entities to deduct net borrowing costs in a given year to a maximum of 30% of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).
EBITDA is used as a guide to the ability of an entity to meet its obligations to pay interest. It is also a measure of earnings often used by lenders in deciding how much interest expense an entity can reasonably afford to bear.
Ireland has implemented the rule for accounting periods beginning on /after 1 January 2022 via the Finance Act 2021. The rule is an important and significant change in Irish tax law. Financial services businesses need to consider how it will impact their operations.
The fixed ratio rule only limits an entity’s net interest deductions – interest expense in excess of interest income. Some multinational groups raise third-party debt centrally in one of their entities considering non-tax factors such as credit rating, currency, and access to capital markets. These funds can then be lent onward to an operating company in the group to fund its activities. The fixed ratio rule is not designed to restrict this and there are two “group ratios” in the rules which could mitigate the impact in certain cases. These provide a measure of relief by allowing a higher interest deduction to an individual taxpayer by reference to the position of the wider accounting group.
How EY can help
EY was actively engaged throughout the consultation process regarding the interest limitation rules. We are well positioned to advise on the impact of the introduction of the rules. We have been connecting with our clients to discuss the implications of the rules and working through the impact on their structures. We have conducted modelling exercises to better understand the impact of the interest limitation rules on current business operations, including:
EY has also been advising on the potential impact of the rules on new structures or transactions that are currently in progress.
We have issued tax alerts containing detailed commentary on the impact and considerations around ILR across various sectors. Our most recent set was released on publication of the Finance Bill in November 2021, and they can be downloaded below:
Contact us today to discuss how we can support your ILR requirements in 2022.