Interest Limitation Rules

Overview

The ILR impacts any company with debt funding that is liable to Corporation Tax in Ireland, and are effective for accounting periods commencing 1 January 2022.

The purpose of the ILR is to limit base erosion by utilising excessive interest deductions. The ILR does this by limiting the maximum tax deduction for net borrowing costs to 30% of Tax EBITDA (follows a specific formula set out in the legislation).

Net borrowing costs is the net amount arrived at by netting taxable interest income against deductible interest expense. Where interest income exceeds interest expense, this is known as “interest spare capacity”.

Application to Groups

Corporate taxpayers may choose to operate the ILR on a single entity or local group basis.

Interest groups include companies, within the charge to Irish Corporation Tax, that are either part of a consolidated group (i.e. for accounting purposes), or members of a tax loss group, and have elected to be part of an interest group.

Where an election is made by a company to be part of an interest group, that election applies for a period of 3 years. After the end of that 3 year period, the election may be withdrawn, but if it is withdrawn, the withdrawal applies for a period of 3 years also.

Exceptions

There are a number of exceptions provided for under the legislation. The exceptions are designed to address circumstances where there is a limited risk of base erosion or profit shifting.

These exceptions are:

Where the company’s (or group’s, if applied on a group basis) net borrowing costs are less than €3 million;
Where a company is a standalone company, being a company that has no associated enterprises or permanent establishments;
Long-Term Public Infrastructure Projects, being a project to provide, upgrade, operate or maintain a large-scale asset in the general public interest; and
Interest on legacy debt, being debt the terms of which were agreed prior to 17 June 2016.

Relieving Measures

The legislation also provides for a number of relieving measures:

Group Ratio

Where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes, and the worldwide group’s net borrowing costs as a proportion of EBITDA are greater than 30%, the Irish taxpayer can use this higher proportion in its own calculations.

Equity Ratio

If the Irish taxpayer’s ratio of equity to assets exceeds 98% of the worldwide group’s ratio, the ILR does not apply, and the entity can get a full deduction for interest.

Carry Forward Provisions

Where the deductible borrowing costs of a company (or interest group) are restricted in an accounting period, the restricted amount can be carried forward to succeeding accounting periods.

The company (or interest group) can then claim relief for those amounts where, having applied the ILR in that future period, it has not met the 30% of Tax EBITDA limit and could therefore deduct more interest in that period.

Where a company’s net borrowing costs has not met the 30% of Tax EBITDA limit, amounts up to the 30% limit can be carried forward for a period of up to 5 years, along with any interest spare capacity.

Reporting Obligations

The legislation sets out detailed reporting obligations for corporate taxpayers. Where a group election has been made, one member of the group shall be appointed to report on behalf of the group.

What BDO can do for you

As well as helping you with ILR calculations and reporting obligations, we can help assess your group’s financing structure and financing costs in order to mitigate the impact of significant restrictions.

Analysis of this restriction will need to be considered in relation to M&A activity, restructurings and refinancing, changes in group profitability and expansion overseas, as well as for annual compliance.

While the ILR is applied after transfer pricing, it will be relevant in determining the level of potential exposure from transfer pricing. Whether to engage in detailed analysis of borrowing capacity and debt pricing may be flavoured by whether, and how significantly, the IRL would restrict interest deductions.

For help and advice on the ILR, please contact Angela Fleming at afleming@bdo.ie