ATAD Interest Limitation Rule

The Interest Limitation Rule (ILR) under Article 4 of ATAD caps the tax deductibility of net borrowing costs at a maximum of 30% of tax-EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation). It implements BEPS Action 4 of the OECD into binding EU law and is designed to prevent profit shifting through excessive debt financing within group structures.

• Safe harbour of up to EUR 3 million for net borrowing costs (Member States may set a lower threshold; non-deductible amounts carried forward)
• Carry-forward and carry-back rules for disallowed interest and unused EBITDA capacity
• Optional escape for standalone companies and group equity ratio tests
• Exemptions possible for long-term public infrastructure projects
• Applies to both intragroup and external debt financing

The Interest Limitation Rule was adopted as part of ATAD in 2016, closely following OECD recommendations from BEPS Action 4 (2015). Member states were required to transpose the rule by 31 December 2018. Germany already had a similar rule (Zinsschranke, §4h EStG) since 2008 but had to adjust it to ATAD requirements.

The parent ATAD framework was supplemented by ATAD 2 (Directive 2017/952/EU of 29 May 2017), which primarily addresses hybrid mismatches and exit taxation but leaves Article 4 on interest limitation unchanged.

Implementation varies across member states, particularly regarding optional escape clauses (group ratio test, equity ratio test). Some countries implemented stricter rules than the ATAD minimum standards prescribe.

The ILR applies to all corporate taxpayers in the EU with net borrowing costs exceeding EUR 3 million. Exemptions may be provided for:

• Standalone companies without group membership
• Financial institutions and insurance companies (optional exemption)
• Long-term public infrastructure projects
• Pre-existing contracts (grandfathering): loans concluded before 17 June 2016 that have not been subsequently modified may be excluded from scope (Art. 4(4) ATAD)

• Calculation of net borrowing costs (interest expense minus interest income)
• Calculation of tax EBITDA based on national tax law
• 30% EBITDA cap for interest deduction; excess amount non-deductible
• Safe harbour: net borrowing costs of up to EUR 3 million fully deductible (Member States may set a lower threshold)
• Carry-forward of disallowed interest to future periods (unlimited or limited per national law)
• Optional: carry-forward of unused EBITDA capacity (up to 5 years, optional rule)
• Optional (Group Ratio Rule, Art. 4(5)(a) ATAD): higher deduction permitted if the taxpayer's net interest/EBITDA ratio does not exceed the group's worldwide net interest/EBITDA ratio
• Optional (Equity Ratio Escape, Art. 4(5)(b) ATAD): full interest deduction granted if the taxpayer's equity-to-total-assets ratio equals or exceeds the group's ratio
• Documentation and reporting obligations to tax authorities

1 correction:
- last_amended shows original adoption date instead of ATAD 2 amendment
5 clarifications.
2 notes.