Facilitation provisions for interest deduction ceiling

The statutory interest deduction ceiling has been in effect since 2008, whereby costs incurred for financing are only deductible as business expenses in the amount of the interest income generated in the same business year while the net interest expenditure in excess thereof is only deductible up to 30 % of the profit. This rule was introduced to restrict the possibility afforded to German subsidiaries to fund themselves from credit from their foreign group parent companies and claim tax relief in Germany. Following strong criticism from the industrial federations and in view of the current financial crisis, the stipulations governing the interest deduction ceiling are to be eased by implementing three changes which are to take effect starting from the 2010 business year:

• The exemption limit which was increased to 3 m. € only until the end of 2009 is to be introduced permanently, so that small- and medium-sized businesses will not ordinarily be affected by the interest deduction ceiling. But if the net interest expenditure exceeds the exemption limit the interest deduction ceiling will be applied to the entire financing expenditure and not only the amount which exceeds the ceiling.
  


• Interest expense for business years commencing after 2009 is deductible up to the amount of the EBITDA. The offsetable EBITDA increases by the amounts already determined fictitiously for the business years commencing as from 1st January 2007. Consequently in years in which the business does not fully utilize the deduction limit of the interest deduction ceiling in respect of its interest expense, the unused part of this deduction limit can be carried forward for a period limited to five business years. However, no EBITDA carry forward takes place if the business is excluded from applying the interest deduction ceiling in the relevant business year.


• The “escape clause” has been revised. This exemption from the interest deduction ceiling cannot be utilized by corporate bodies if detrimental shareholder debt financing is in place. This is the case when the remuneration paid for loan capital by an affiliated group company is to a shareholder outside the group whose share exceeds 25 %, and on aggregate such remuneration exceeds 10 % of the interest balance of the affiliated group company in the business year. In this case the tolerance range of the equity ratio within the group for the equity variation of an affiliated enterprise is increased from 1 to 2 % of the total interest expense in connection with external financing of the group.

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