Are you aware of the latest restriction on the deductibility of borrowing costs?
On 1 April 2019, Act No. 80/2019 Coll. came into force which, among other things, amended certain provisions of the Income Tax Act (Act No. 586/2019 Coll.).
Specifically, the bill inserted a new Section 23e in the Income Tax Act which addresses the tax deductibility of exceeding borrowing costs. The provision implements into national law the interest limitation rule of the ATAD Directive which curbs the tax deductibility of exceeding borrowing costs for the purpose of determining the income tax base of legal entities for the given fiscal year.
The term ‘exceeding borrowing costs’ comprises not only interest but also other financing costs and fees related to borrowing, forex gains and losses on borrowing costs, the interest element of finance lease payments, etc. By contrast to the thin capitalization test, the relevant expenses here also include capitalized interest which is included in the balance sheet value of the relevant asset. At the same time, it is of no concern whether I am paying the exceeding borrowing costs to an affiliated entity or to an independent entity (such as a bank).
The limit for the deductibility of exceeding borrowing costs is the higher of the following amounts:
- 30% of tax-EBITDA, or
- CZK 80,000,000.
It follows that CZK 80,000,000 is always the limit of tax deductibility, unless 30% EBITDA is higher than that. If my exceeding borrowing costs are less than CZK 80 million, the interest limitation rule has no impact on me.
The tax base will have to be raised by the positive difference between the exceeding borrowing costs and the deductibility limit.
For the sake of completeness, it should be noted that the exceeding borrowing costs are being reduced by taxable borrowing income (if any).
If the operating result, or the difference between revenues and expenses, will increase as a consequence of the limitation of the deductibility of exceeding borrowing costs, the tax base in future periods may be reduced by this amount, up to the positive difference between the deductibility limit and the actual exceeding borrowing costs in the given period.
Going forward, taxable entities will therefore have to test two separate thresholds for the tax deductibility of interest and related expenses: first, they must perform the thin capitalization test for loans between affiliated entities. Then, they must determine their exceeding borrowing costs and compare them against the above-mentioned thresholds.
Income Tax Act (Act No. 586/1992 Coll.);