Historical reason
The interest barrier was introduced by the legislator to safeguard the domestic tax base and avoid abusive tax arrangements. In particular, this regulation was intended to prevent groups from transferring German tax substrate abroad by means of cross-border group-internal debt financing solely for reasons of tax optimisation in order to achieve a favourable overall tax burden (BT-Drs. 16/4841, 31). The introduction of the interest barrier was intended to cover all types of debt financing.
Term
The term "interest barrier" refers to two regulations on the deduction of business expenses for interest expenses: A basic rule that applies to applicable to all commercial enterprises (§ 4h EStG), and a supplementary provision that is applicable to Corporations special features (Section 8a KStG new version).
The basic rule and its exceptions from 2024
A company's interest expenses are generally immediately tax-deductible within the scope of the interest barrier up to the amount of interest income from the same business and the same financial year. Interest expenses in excess of this (so-called "excess debt interest") are deductible in the amount of 30 % of the offsettable EBITDA. The basic rule provides for three exceptions:
- The amount of interest expenses, insofar as it exceeds the amount of interest income, is less than EUR 3 million ("exemption limit")
- the company is not related to any person within the meaning of § 1 para. 2 AStG and does not have a foreign permanent establishment ("stand-alone clause")or
- the company belongs to a group and its Equity ratio is at the end of the previous reporting date equally high or higher than that of the Group ("escape clause").
The exemption limit
The most significant exception to the exemption limit in practice to date generally only benefits small companies. Medium-sized companies can quickly exceed the exemption limit of EUR 3 million due to the new interest rate environment. Exceeding the exemption limit means that the total interest expensesare subject to the interest barrier to the extent that they exceed the interest income.
The stand-alone clause - new definition of group affiliation
Before 2024, it was sufficient for the company not to be part of a group, or only part of it, in order to make use of the stand-alone clause. Due to the Tightening from 2024 Stand-alone clause is already ruled out if at least one of the Shareholder has a direct or indirect shareholding of at least 25% in the company. According to the explanatory memorandum to the law, this is intended to prevent financing arrangements between a corporation and its shareholder. Until then was often characterised by Formation of a group of organisations fulfil the stand-alone clause, as the fiction of the tax group as one company meant that they were not part of a group. The new regulation therefore includes these companies in the interest barrier, whereas under previous law they were excluded from this as not belonging to a group.
Escape clause
The interest barrier still does not apply if the business is part of a group, but it can be proven that the equity ratio of the business at the end of the previous reporting date is not more than 2 % below the equity ratio of the group. In the case of corporations, the existence of shareholder debt financing in accordance with Section 8a (3) KStG must also be ruled out.
According to Section 4h (3) sentence 4 EstG, a business should only belong to a group if, according to the accounting standard used for the application of (2) sentence 1 lit. c, it is to be consolidated with one or more other companies. is consolidated. The previous inclusion of companies that could be consolidated with one or more other companies will be cancelled.
Criticism and inappropriate effects for corporations
Group companies can fulfil the stand-alone clause by forming a tax group (fiction of the tax group as one company). not more as soon as a Shareholder with at least 25% in the company claiming the interest deduction. Due to the tightening that has now occurred, the exemption will become less important in practice.
The escape clause as a further exception to the interest barrier will play a central role in the unlimited deduction of interest expenses despite the stricter access requirements. The decisive factor here will be whether the company is consolidated in accordance with the relevant accounting standards and what the equity ratio is in the group. In order to avoid massive tax effects when applying the interest barrier, group structures must be adjusted in such a way that they fall under the escape clause. This also includes a review and adjustment of the financing structures together with the equity ratios.
Inappropriate effects arise for corporate structures that are denied the exemption of the stand-alone clause and that have no consolidation options due to the lack of a majority shareholding and are therefore also excluded from the application of the escape clause (e.g. shareholding relationship between 25% and 50%).
The regulations on the interest barrier also apply to exclusively in Germany companies operating in the Group. This applies regardless of whether the group is financed externally by the shareholders. The interest barrier also applies in the case of pure bank financing. Against the background of the current interest rate environment and the expensive refinancing of investment measures, additional avoidable tax burdens may arise for group companies.
Your TAXGATE team will be happy to provide you with proactive advice on avoiding these adverse effects and to provide further information.
