What are interest limitation rules?
Interest limitation rules are tax rules that restrict the amount of debt financing costs that a taxpayer may deduct for corporate income tax purposes. Their main function is to prevent excessive debt financing, especially where debt is used to shift taxable profits from one jurisdiction to another or to reduce the tax base of an operating company.
In practice, these rules apply to costs such as interest, certain fees, commissions, premiums, financing-related charges and other expenses economically connected with obtaining debt financing. They may apply not only to loans from related parties, but also to external financing, depending on the applicable domestic law.
At EU level, the key framework is Article 4 of Council Directive (EU) 2016/1164, known as the Anti-Tax Avoidance Directive or ATAD. Article 4(1) ATAD requires Member States to limit the deductibility of exceeding borrowing costs to 30% of the taxpayer’s EBITDA. Article 4(3) ATAD allows Member States to introduce a de minimis threshold of up to EUR 3,000,000. In Poland, the corresponding rules are implemented mainly in Article 15c of the Polish Corporate Income Tax Act.
How do interest limitation rules work?
The rules usually require the taxpayer to identify its debt financing costs and compare them with financing income. The excess of financing costs over financing income is then tested against a statutory limit. If the excess exceeds the applicable threshold, part of the costs may be non-deductible for tax purposes in the relevant tax year.
Under Polish corporate income tax rules, the limitation mechanism refers to the excess of debt financing costs and compares it with the higher of PLN 3,000,000 or 30% of the tax EBITDA calculated under Article 15c of the Polish Corporate Income Tax Act. The PLN 3,000,000 threshold and the 30% EBITDA ratio result from Article 15c of that Act. Non-deducted debt financing costs may generally be deducted in the following 5 tax years, subject to the statutory limit applicable in those years, as provided in Article 15c(18) of the Polish Corporate Income Tax Act.
The calculation is technical. It requires correct classification of financing costs, identification of taxable financing income, verification of exclusions and proper calculation of tax EBITDA. Accounting EBITDA and tax EBITDA are not always the same. For this reason, interest limitation analysis should not be based only on financial statements without checking the tax treatment of revenues and costs.
When are interest limitation rules relevant?
Interest limitation rules are relevant whenever a company uses debt financing and incurs material interest or similar financing costs. This includes bank loans, shareholder loans, bonds, intra-group financing, cash pooling, acquisition financing, refinancing, finance leases and other arrangements that generate debt-related costs.
The rules are particularly important in leveraged transactions, group restructurings, real estate investments, acquisition structures and financing models involving related parties. They may also affect companies with high capital expenditure, temporary losses, low operating margins or significant foreign exchange and financing costs.
For international groups, interest limitation rules should be analysed together with transfer pricing rules, withholding tax, beneficial ownership requirements and anti-abuse provisions. A financing arrangement that is acceptable from a commercial perspective may still create tax risks if the interest rate, debt level, documentation or business rationale is not properly supported.
Why is early legal and tax review important?
A timely review of interest limitation rules can help avoid incorrect tax deductions, disputes with tax authorities, tax arrears, interest on tax arrears and adjustments in future tax years. It can also support safer structuring of financing before a loan agreement, acquisition agreement or restructuring plan is signed.
In many cases, the most important issues arise before the financing is implemented. These include the choice between debt and equity, the level of leverage, the expected tax EBITDA, the treatment of fees and commissions, and the possibility of carrying forward non-deducted costs. Early analysis helps identify whether the financing model is tax-efficient and defensible.
Legal support in relation to interest limitation rules
Support in relation to interest limitation rules may include in particular:
- analysis of the deductibility of interest and other debt financing costs,
- verification of the application of Article 15c of the Polish Corporate Income Tax Act,
- review of intra-group financing, shareholder loans and external debt arrangements,
- assessment of the tax impact of acquisition financing and refinancing,
- coordination of interest limitation analysis with transfer pricing documentation,
- support in tax audits, disputes and correspondence with tax authorities,
- review of financing clauses in transaction and restructuring documentation.
Need assistance with interest limitation rules? Contact us.
See also
- Corporate tax
- Tax Law
- Transfer pricing
- Financial reporting