You don’t need a crystal ball to predict that a lot of companies will be confronted with a lower EBITDA than projected. Especially for highly leveraged businesses, this may bring some additional challenges. Indeed, by transposing the interest limitation rules embedded in the EU Anti-Tax Avoidance Directive (‘ATAD I’) in national law, Belgian taxpayers may be confronted with a deferral of a portion of the interest deduction to future years as their markets slow down.
Item #14: Impact of decreasing EBITDA on interest deductions
According to the new limitation rule, exceeding borrowing costs are not considered as business expenses and therefore not deductible above €3m – at group level – or 30% of the taxpayer’s EBITDA. The notion of ‘exceeding borrowing costs’ (EBC) means the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues derived by the taxpayer. The acronym ‘EBITDA’ stands for earnings before interest, taxes, depreciation, and amortization and strips all those items out in order to focus on the essentials: operating profitability and cash flow. While the acronym used for the purpose of this tax rule is the same as the well-known accounting acronym, its calculation is somewhat different from the latter.
Companies that calculated their interest deduction capacity based on 30% of their EBITDA and which are now confronted with a decrease of their EBITDA, may no longer be able to deduct all interest expenses. As highlighted before, other financing costs can be caught by this rule.
However, it’s not all doom and gloom. Unlike losses that are subject to limitations, non deductible exceeding borrowing costs can be carried forward indefinitely to future years, without any other limitation than the €3m threshold or 30% EBITDA. In addition, any non-used interest deduction capacity of one Belgian group entity can be transferred to another Belgian group company or related Belgian PE. A transfer agreement should be concluded between both parties, in which they can opt for a compensation payment amounting to the tax saving that one of the parties involved has received as result of the transfer.
In order to mitigate the adverse tax consequences of a decreasing EBITDA, sensitivity testing on the tax deductibility of interest payments in Belgium and abroad is highly recommended:
- Asses whether it is more advantage to carry the exceeding borrowing costs forward to the following year(s) in which you might have higher EBITDA or to transfer them now within the group;
- Consider adjusting your provisions for taxation;
- Assess whether non-deductible interest is only a timing difference or creates a structural tax leakage. And in case of structural tax leakages, consider restructuring the financing (taken into account the TP principles like options realistically available).
Understanding the struggle of multinationals trying to assess and deal with the impact of the limitation rules, PwC has developed a web-based solution, named ILIA (Interest Limitation Insights & Analytics), that enables clients to perform these complex underlying calculations and assess optimization opportunities in-house. ILIA not only automates the calculations and makes estimations of cash tax effects, but also allows real-time calculations for EBITDA capacity transfers and group contributions transfers. In addition, it allows for certain modelling features to assess the impact of new financing structures, updated business plans, etc. Feel free to contact us to schedule a live demo via the following email platform: firstname.lastname@example.org.
While most companies have applied for the COVID-19 measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: email@example.com in order to give you a sounding board in these challenging times.