Austria appears to have incorrectly applied a derogation in relation to the implementation of the interest limitation rule contained in the EU's Anti-Tax Avoidance Directive.
The EU's Anti-Tax Avoidance Directive (ATAD), inter alia, requires Member States to implement an interest limitation rule in their domestic laws. Pursuant thereto, the tax deductibility of net interest (interest expenses minus interest income) shall be limited insofar as it exceeds an amount of 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA). In general, this rule should have been implemented by 31 December 2018. However, by way of derogation, Member States which have national targeted rules for preventing base erosion and profit shifting (BEPS) risks as of 8 August 2016, which are equally effective to the interest limitation rule set out in the ATAD, may delay the implementation of the interest limitation rule at the latest until 1 January 2024 (cf. art. 11(6) of the ATAD).
For several years already, Austrian tax law has provided for a non-deductibility of interest paid to a corporation if the payer and recipient are, directly or indirectly, part of the same group, or have, directly or indirectly, the same controlling shareholder; and the interest paid at the level of the recipient (or the beneficial owner, if different) is:
- not subject to corporate income tax owing to a comprehensive personal or material tax exemption;
- subject to corporate income tax at a rate of less than 10%;
- subject to an effective tax rate of less than 10% owing to an applicable reduction; or
- subject to a tax rate of less than 10% owing to a tax refund (refunds to the shareholder are also relevant).
This Austrian non-deductibility rule was implemented in the wake of the OECD's first steps against BEPS. It is probably for this reason that the Austrian Ministry of Finance believes that Austria already has in force "targeted rules for preventing base erosion and profit shifting (BEPS) risks [...] which are equally effective to the interest limitation rule", thus allowing Austria to delay implementation of the 30% EBITDA rule. Therefore, in autumn 2018 Austria implemented ATAD, except for ATAD's interest limitation rule.
In this context, the European Commission recently published a list of Member States which in its view fulfil the requirements as per art. 11(6) of the ATAD (cf. Commission Notice 2018/C 441/01). When drawing up the list, the European Commission assessed the legal similarity and the economic equivalence of measures notified by Member States:
- The basic assumption for the examination of legal equivalence was that only measures which ensure limitation on deductibility of exceeding borrowing costs in relation to factors of a taxpayer's profitability may be primarily regarded as equally effective in targeting excessive interest deductions.
- The analysis of economic equivalence in turn involved two criteria: First, the notified national measure should not produce significantly less revenue than the ATAD's interest limitation rule. Second, the notified national measure should lead to a similar or higher tax liability for a majority of large undertakings as compared with the estimated result under the ATAD.
Applying these criteria, the European Commission concluded that specific measures in force in France, Greece, Slovakia, Slovenia and Spain fall under art. 11(6) of the ATAD. The list, however, does not include Austria, meaning that Austria has – in the European Commission's view – incorrectly not implemented the ATAD's interest limitation rule. It is not yet clear how the Austrian Ministry of Finance will react.
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