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Article:

EU Anti-Tax Avoidance Directive – interest limitation

04 July 2016

On 21 June the EU Council approved a revised draft Anti-Tax Avoidance Directive (ATAD). The ATAD will require EU Member States to operate anti-avoidance rules in five areas of tax:

  • Interest limitations
  • CFCs
  • Anti-hybrid rule
  • Exit taxation
  • General anti-abuse

The original draft ATAD was released on 28 January 2016 and would have conflicted with the UK’s planned rules in several of these areas. For the rules on limiting interest deductions, certain elements of the rules originally proposed, such as a €1m de minimis and a debt to asset value ratio safe harbour (in place of a group interest ratio rule) would have conflicted with the UK’s plans.

However, in the revised directive that has received approval, the ECOFIN Council resisted calls to take a more restrictive approach on the fixed ratio: the new proposals are broadened and consistent with the UK’s planned approach. The table below compares the two sets of proposed rules.

Rule UK position EU Directive (permitted rules)
De minimis £2m €3m
Fixed ration rule (max. permitted net interest to EBITDA) 30% 30%
Extension based on group wide position - Group ratio - same percentage of net interest to EBITDA as the group has based on unrelated party interest only
- Capped at group's unrelated party interst expense
Either:
- 'Equity relief' rule - exemption from rule for companies with debt to total assets ration within 2% of the group debt to equity ratio
- Group ratio - same percentage of net interest to EBITDA as the group has based on unrelated party interest only
Exemptions - Public benefit exemption
- Financial services (pending other rule)
- Standalone companies- Long term infrastructure in the EU- Financial Services
Carry-forward/back - Restricted interest carried forward indefinitely and spare capacity carried forward up to three years One of:
- Restricted interest carried forward indefinitely
- Restricted interest carried forward indefinitely or back up to three years
- Restricted interest carried forward indefinitely and spare capacity forward up to five years
Fixed caps Cap of net interest at total group net expense None
Grandfathering None All loans concluded before 17 June 2016, until any modification
Introduction 1 April 2017 - 1 January 2019
- Any similar rules addressing Action Point 4 can remain in place until OECD publishes a final minimum standard, or at the latest, 1 January 2024

Given the leave vote in the UK’s EU referendum, the importance of the ATAD to the UK may have waned, although there may be at least some period for which it will apply to the UK. Companies operating across the EU will, of course, need to become familiar with the Directive as it will be enforced across the remaining EU Member States, giving a wide take-up of the OECD’s proposed actions in these areas.

Read the ECOFIN Council report and revised directive.