Hot topics in Finance
Nordic Tax Conference 2012
© 2012 CORIT
Agenda
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Overview of international tendencies on interest limitation rules (from
thin cap to EBIT tests etc.), ACE-regimes and anti arbitrage rules.
Introduction to Danish interest limitation and anti arbitrage rules on
financing.
Swedish rules on interest limitation and the Swedish view on arbitrage
etc.
Proposed Finnish interest limitation regime (apparently postponed).
Reflections on international issues and wider impact.
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Overview of International Tendencies in
Corporate finance
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Global overview
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Increasing use of interest limitation legislation
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EBIT type legislation - Italy, Spain, Germany, Denmark
UK Arm’s length test and World Wide Debt Cap
Finland, Sweden, France
France (proposal 2012)
– Global cap on finance charges
– Interest on loans generally is deductible for French corporate
income tax purposes.
• Thin capitalization rules.
– Deduction for interest on a loan obtained to acquire a participation
in another company also may be disallowed in certain
circumstances.
– Proposal: Interest deductibility capped to 85% of their net amount
as from fiscal year 2012.
• De minimis of EUR 3 million.
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Global overview
• Development in Allowance for Corporate Equity (ACE) regimes
– Brazil (1996) - ”Juros sobre o Capital Próprio” (JCP).
– Belgium (2005) – Notional Interest Deduction
– Latvia (2009)
– Italy (2011) (see next slide)
– Presently considered in other jurisdictions
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Overview
Italian NID regime (2011)
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Italy also (re-)introduced a Notional Interest Deduction regime on 22 December 2011.
– “Aiuto alla Crescita Economica”.
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The deduction aims to encourage equity financing and create neutrality between Italian
companies funded with equity and those funded with debt.
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ACE rules entitle Italian entities to a tax deduction computed by applying a notional yield to
the increase in their net equity (the “ACE base”).
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The notional yield is fixed at 3% for fiscal years 2011, 2012 and 2013.
– After 2013, the notional yield will be determined annually by a Ministerial decree
based on the yields on Italian treasury bonds and could be increased by an additional
3% to compensate for higher business risk.
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Ministerial decree provides specific anti-avoidance rules.
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Global overview
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Increasing focus on mismatch arrangements
– OECD and EU reports in 2012
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EU: Public consultation on the double non-taxation of cross-border
companies
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Public consultation
– The public consultation covers cross-border double non-taxation of
companies, i.e. cases where divergent national rules and/or
inadequate national tax measures in two countries lead to nontaxation
– Aim of the Consultation is to understand the full scale of the
problem in order to develop the most appropriate policy response
by end of 2012
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Global overview
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Staff working paper: The internal market: factual examples of double
non-taxation cases
– The working group have identified a number of issues where
double on-taxation could occur. List is not to be considered
exhaustive.
• Hybrid Entities
• Hybrid Instruments
• Use of Double Tax Treaties leading to double non-taxation
• TP and Unilateral APAs
• Transactions with associated enterprises in countries with no or
extremely low taxation
• Debt financing of tax exempt income
• Disclosure
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Global overview
• OECD: Hybrid Mismatch Arrangements Tax Policy and Compliance Issues
– Published March 5, 2012
– No comprehensive data exists on the collective tax revenue
loss caused by hybrid mismatch arrangements, anecdotal
”evidence” shows that amount at stakes are high
– The report describes the most common types of hybrid
mismatch arrangements, the effects they aim to achieve, the
tax policy issues raised and the policy options to address
them (focus on domestic law)
• The report does not address the tax treaty implications
of hybrid mismatch arrangements (addressed by working
party no. 1)
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Global overview
• Conclusions
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Hybrid mismatch arrangements that might comply with the letter of the law but
achieve double non-taxation generate significant policy issues in terms of revenue,
competition, efficiency, fairness and transparency.
The same concern which exists in relation to double taxation exists in cases of
unintended double non-taxation.
Specific and targeted rules hold significant potential to address certain hybrid
mismatch arrangements and have recently been introduced by a limited number of
countries.
Country experience with respect to the design, application and effects of such rules is
positive. However, the application of the rules needs constant monitoring to ensure the
rules are not circumvented.
• Recommendations
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OECD recommends countries to:
1. Consider introducing/revising specific and targeted rules denying benefits in
case of hybrid mismatch arrangements.
2. Continue sharing relevant intelligence on such arrangements.
3. Consider introducing/revising disclosure initiatives targeted at hybrid mismatch
arrangements.
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Brief introduction to Danish interest limitation and
Anti Arbitrage Rules on Financing
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Interest limitation rules
Comprehensive Legislation
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Thin capitalization (sec. 11 of the CIT)
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Asset rule (sec. 11 B of the CIT)
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1998
Classic regulation
2007
One of a kind
EBIT rule (sec. 11 C of the CIT)
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2007
Similar to the approach in Germany and Italy
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The Thin Capitalisation Test
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A corporation is thinly capitalized if the debt-to-equity ratio exceeds 4:1 at the
end of an income year, provided that the controlled debt exceeds 10 MDKK.
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Interest expenses and capital losses regarding the controlled debt that should be
converted to equity so the dept-to equity ratio is not exceeded, are not
deductible.
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The thin capitalisation only applies to controlled debt to companies.
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The rules also include third party debt which is secured by a group company.
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If the company is able to substantiate that the financing is at arm’s length terms,
the company will be allowed to deduct interest expenses even though the 4:1
ratio is exceeded.
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The thin capitalisation test shall be applied on a consolidated basis for Danish
companies belonging to the same group.
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The Asset Test
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Under the asset test net financing expenses may be deducted only if the
expenses do not exceed a standard rate of presently 3.5 per cent (2012) of the
value of the tax base of certain qualifying assets.
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The value of the tax base consists of the depreciated value of the company’s
assets. Assets, which are not depreciable, are included at the acquisition costs
plus improvements.
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As a main rule, shares and claims are not part of the tax base according to the
asset test.
– Special rules applies to foreign shareholdings.
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The deductibility of net financing expenses up to DKK 21.3 million (2012) is not
restricted by the asset test.
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The assets and the net financing expenses are considered on a consolidated basis
for group companies.
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The EBIT Test
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Remaining interest payments which are deductible after the application of the
thin capitalisation rules and the asset test may be restricted under an EBIT test.
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According to the EBIT-test, the deductible net financing expenses cannot exceed
80 % of the earnings before interest and tax.
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I.e. interest above 80% of EBIT are restricted.
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As with the asset test, the EBIT test only applies if net financing expenses exceed
DKK 21.3 million (2011).
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The net financing expenses and the EBIT should be considered on a consolidated
basis for group companies.
© 2012 CORIT
EBIT rule
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Comparative overview
Germany
Italy
Spain
Denmark
Cost
Net financing costs
Net financing costs
Net financing costs
Net financing costs
Limit
30 % of EBITDA (tax)
30 % of EBITDA
(accounting)
30 % of EBITDA (tax)
80 % of EBIT (tax)
Notes
EUR 3 mio. de minimis
Excessive EBIT base can
be carried forward
EUR 1 mio. de minimis
DKK 21,3 mio. de
minimis
Does not apply to nongroup companies
Does not apply if the
debt/equity ratio does
not exceed the groups
debt/equity ratio
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Danish Anti Arbitrage Provisions
• Interest payments between group companies
– Limitation on interest deductibility in Denmark if the debt
instrument is treated as equity in another jurisdiction (§ 2 B CIT).
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Inbound dividends
– Participation exemption does not apply if dividends are deductible
for the payor (§ 13 CIT).
– Unless EU Parent Sub Directive applies.
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Reflections on International issues and wider
impact of Interest Deduction limitation Rules
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Reflections…..
• EU law implications
• Wider implications
– Uncertainty
– Investment climate
– Group financing vs. Third party financing
– Harmonization
© 2012 CORIT
JAKOB BUNDGAARD
MANAGING DIRECTOR
HONORARY PROFESSOR, M.SC., PH.D.
CORIT ADVISORY P/S
LYNGBY HOVEDGADE 17, 2. SAL
2800 KONGENS LYNGBY
DENMARK
P: +45 40 42 22 84
E: JB@CORIT.DK
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