The Corporate Income Tax (CIT) Act reform effective from 1 January 2018 has brought changes to all aspects of CIT treatment, including thin capitalisation rules. This article explores whether banks and insurance companies should include their excess interest expenses in their CIT base (taxable income).
Section 10 of the current CIT Act specifies cases where excessive interest expenses must be included in the CIT base using two methods for measuring the excess. Under one method the CIT base must include any interest paid on a loan that exceeds four times shareholders’ equity at the beginning of the tax year (a debt-to-equity ratio of 1:4). The other method applies where interest expenses for the financial year exceed EUR 3 million: the CIT base must include an amount of interest that exceeds 30% of the EBITDA appearing in the profit and loss account for the year.
Section 10(5) of the CIT Act specifies seven exclusions that allow interest expenses to stay out of the CIT base. CIT does not apply on interest paid on the following items:
Effective up to 31 December 2017, the old CIT Act made it clear that the thin capitalisation rules did not apply to credit institutions and insurance companies, meaning those companies did not have to identify the provider of finance or measure any excess interest using statutory methods. This exception is no longer available under the new CIT Act.
This raises the question of whether leaving credit institutions and insurance companies off the list of exclusions has been a deliberate step by the lawmaker. Unlike banks, which can probably use one of the other exclusions mentioned in the CIT Act, insurance companies having borrowed from another company within their group should assess whether their excess interest expenses should be included in the CIT base.
If you have any comments on this article please email them to lv_mindlink@pwc.com
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To pick up where we left off in our earlier article Ways of reducing tax on profit distribution, which discusses how to minimise your corporate income tax (“CIT”) liability when distributing “new” profits, this article explores some personal income tax (“PIT”) relief an individual can take even if the company has already claimed one of the available CIT reliefs according to the current practice.
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