Interest Limitation Rules

With new reporting requirements around interest limitation rules required for accounting periods from 1st January 2022, what steps could corporates be taking to meet obligations under the rules?

Conall Brennan-McMahon, Tax Consultant, Maples Group: The interest limitation rules aim to restrict a company's interest deductions to 30% of its EBITDA. Ireland was required to implement the rules in accordance with Council Directive (EU) 2016/1164, and they are contained in Part 35D of the Taxes Consolidation Act, 1997.

Many Irish companies have now filed a corporation tax return for the financial year ended in 2022 based on the new rules and are already taking steps to manage their ongoing obligations. Practically, auditors and tax compliance providers expect companies to obtain written advice on how the rules apply to the most recent set of accounts. It is likely that some form of this advice will be required for each future accounting period.

We have advised a number of Irish corporate and investment structures on the new rules and have seen companies take several approaches to managing them. Given that interest rates continue to rise – and so does the risk associated with the rules – it is worth considering whether the strategy adopted in 2022 remains appropriate for 2023 and beyond.

From a policy standpoint, there are two main ways to protect the tax base from excessive interest deductions. One is to apply a maximum interest-to-EBITDA ratio, which is vulnerable to interest rate changes. The other is to apply a maximum debt-to-assets ratio, which encourages gearing up to the allowable level. The debt-to-assets ratio is the approach favoured in New Zealand and, until recently, Australia.

When the EU Member States agreed to adopt an EBITDA-based interest limitation measure in 2016 (following the OECD's recommendation), the European Central Bank's main lending rate was exactly 0%. Today, it is 4.5%.

The effect of that movement on private debt, including transfer-priced intercompany debt, devalues the rules' €3m de minimis exemption. By way of rudimentary example, €3m of interest expense at a 3.5% rate equates to €86m of debt. With an 8% rate and the same amount of interest expense, the debt is €38m. A company could reduce the size of its debt between 2022 and 2023 and yet have a worse outcome under the rules. This is not just a remote possibility, as we are seeing banks' appetite to lend into the corporate and real estate markets decline in the second half of 2023.

Where companies exceed the €3m de minimis threshold, we expect to see greater reliance on measures relating to groups. These measures include elections to:

  • form a domestic interest group treated as a single entity under the rules;
  • replace the 30% company-level EBITDA limit with the worldwide group's ratio of interest expense to EBITDA; or
  • exempt a company whose ratio of equity to total assets is no more than 2% below that of the worldwide group. The last of these measures effectively

switches the rules into applying a debt-to-assets ratio. However, the concept of a worldwide group requires careful consideration. It is defined by reference to an accounting consolidation test. Companies should consider what information they need to gather from

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.