BEPS Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

Companies can reduce profits in high-tax states and shift them to low-tax jurisdictions through intra-group loans and excessive financing structures. Action 4 recommends a uniform interest limitation based on EBITDA.

• Best practice approach: net interest deduction limited to 10-30% of tax EBITDA
• Group ratio rule as supplement where the group has higher third-party leverage
• De minimis threshold to protect smaller entities
• Special rules for banks and insurance companies
• Not a minimum standard, but largely implemented in EU (ATAD 1)

Many countries had thin capitalisation rules prior to BEPS, using various approaches (fixed debt-to-equity ratios, arm's length principle). These rules were easily circumvented. The 2015 BEPS final report recommended a shift to a uniform EBITDA-based rule.

An updated report in 2016 provided guidance on banks, insurance companies and public-interest projects. The EU implemented Action 4 through the interest limitation rule in ATAD 1 (Art. 4), applicable from 2019 (with transition option to 2024).

Since 2017, the Inclusive Framework has monitored implementation. Over 40 countries have introduced EBITDA-based interest limitation rules (as of 2025).

Action 4 applies primarily to entities in multinational groups bearing interest expenses to related or unrelated parties. Countries may also extend rules to standalone entities. Typical simplifications/exclusions include:

• Standalone entities (at country discretion, as lower BEPS risk)
• Financial sector entities (with adapted rules)
• Public interest projects (PPP structures)

• Net interest deduction limited to 10-30% of tax EBITDA (fixed ratio rule); the EU set a ceiling of 30% of EBITDA in ATAD Art. 4
• Optional: group ratio rule (group net interest/EBITDA as alternative benchmark)
• De minimis threshold (OECD recommendation: EUR 1-3 million net interest expense); the EU set a de minimis of EUR 3 million in ATAD Art. 4
• Carry-forward of disallowed interest expense and unused interest capacity (carry-back available in few countries only)
• Special rules for regulated financial institutions

3 corrections:
- Scope contradiction: Standalone entities simultaneously included and excluded
- English title uses 'via' instead of 'Involving' (OECD original title)
- German title heavily abbreviated: 'Base Erosion' and 'Other Financial Payments' missing
1 update:
- official_url uses deprecated OECD website structure
2 clarifications.
3 notes.