Guidelines for the implementation of thin capitalisation rules – Circular 1037/2015

Guidelines for the implementation of thin capitalisation rules – Circular 1037/2015

The provisions of Article 49 of the Greek Income Tax Code (Law 4172/2013), as in force having been amended by the provisions of Article 23(4) of Law 4223/2013 and further amended by Article I(D)(D1)(12) of Law 4254/2014, introduced thin capitalisation rules to combat abuses. These rules are in accordance with international practice and the guidance set out in the Resolution of the Council of the European Union of 8 June 2010 on coordination of the Controlled Foreign Corporation (CFC) and thin capitalisation rules within the European Union (2010/C156/01).

The provisions of paragraph 1 of that Article state that without prejudice to paragraph 3, interest expenses are not recognised as deductible business expenses to the extent that surplus interest expenses are over 30% of the taxable EBITDA. EBITDA is set based on the financial statements prepared in accordance with the Greek accounting rules using tax adjustments specified in the Greek Income Tax Code (ITC), in other words after adjusting the business’ accounting results in line with the provisions of the ITC (Law 4172/2013).

For the purposes of implementing this Article, interest has the meaning given to it in Article 37(1) of Law 4172/2013.

Under the provisions of Article 72(9)(a) of Law 4172/2013, which were inserted by Article 26(3) of Law 4223/2013, the rate of 30% of EBITDA applies to interest expenses incurred in tax years commencing from 1.1.2017 onwards.  In the transitional period (i.e. tax years which commence from 1.1.2014 up to 31.12.2016) the following EBITDA rates apply:

Paragraph 2 states that the term ‘surplus interest expenses’ means a surplus of interest expenses compared to interest income.

Interest expenses means all interest the business pays in any tax year, whether relating to loans received from an affiliated or other company, or from a credit institution, from corporate bonds, etc. It is understood that interest expenses do not include loan expenses.  To give effect to this Article, interest expenses do not include any capitalised interest. Likewise, interest income includes all income from interest, irrespective of the cause, which the business earns in any tax year.

Paragraph 3 states that the interest expenses referred to in paragraph 1, i.e. surplus interest expenses exceeding 30% of EBITDA, are fully recognised as deductible business expenses, provided the amount of net interest expenses entered in the accounting books does not exceed € 3,000,000 a year.

The provisions of Article 72(9) (b) of Law 4172/2013, as in force, state that the above threshold of € 3,000,000 applies to interest expenses incurred in tax years commencing from 1.1.2016 onwards. In the transitional period (i.e. tax years which commence from 1.1.2014 up to 31.12.2015) the threshold for interest expenses is € 5,000,000.

Consequently, when interest expenses are below the threshold applicable in each case (€ 3,000,000 or € 5,000,000 respectively), they are deductible from the business’ gross income, subject however to the provisions of Article 23(a) of that same Law which state that interest from loans the business receives from third parties, other than bank loans, inter-bank loans and bond loans issued by companies, are not deductible from the business’ gross income, to the extent that they exceed the interest which would arise if the interest rate were equal to the interest rate on open account loans to non-financial businesses, as set in the Bank of Greece’s Bulletin of Conjunctural Indicators for the nearest time period prior to the date of borrowing.

It is clear from these points that in tax years which commence in the period from 1.1.2014 to 31.12.2014, the non-deductible amount is the positive amount resulting from the formula below, when interest expenses exceed € 5,000,000: [Interest expenses – Interest income] – 60% x EBITDA

Likewise, in subsequent tax years, using the same formula, the following percentage rates x EBITDA and interest expenses thresholds are to be used:

Paragraph 4 states that all interest expenses not deducted in accordance with paragraph 1 of this Article are to be carried forward, without time restrictions, to be deducted [in the future] from the business’ gross income.

To give effect to this paragraph, the public administration accepts in Circular 1037/2015 that the non-deducted amount of interest expenses in each tax year must be carried forward to subsequent tax years in which the surplus interest expenses are below the relevant percentage of EBITDA, as applicable from time to time. Note that the amount carried forward in each tax year cannot exceed the amount which arises from the percentage of EBITDA applicable for that same tax year, less the surplus interest expenses for that year, given that the percentage of EBITDA is the maximum permissible amount of interest expenses deductible in any given year.

Example:

In the 2014 tax year a company paid interest of €16,000,000 in total (which is a figure above the € 5,000,000 threshold) and collected interest of € 10,000,000 meaning that the surplus interest expenses amounted to € 6,000,000.

During that year its taxable EBITDA was € 2,000,000. In other words, the maximum amount of interest expenses which can be deducted for tax purposes (i.e. 60% of the company’s EBITDA) is € 1,200,000. Consequently, in the 2014 tax year the sum of € 4,800,000 (€ 6,000,000 – € 1,200,000) is not deductible from the company’s gross income for tax purposes.

In the next tax year (2015), the company pays interest of € 12,000,000 (which is above the € 5,000,000 threshold) and collects interest of € 10,000,000, meaning that the surplus interest expenses are € 2,000,000, while its taxable EBITDA is € 6,000,000. In other words, the maximum amount of interest expenses which can be deducted for tax purposes in that year (50% of the company’s EBITDA) is € 3,000,000.
Consequently, in that tax year the surplus interest expenses are € 1,000,000 below the 50% of EBITDA (€ 3,000,000 – € 2,000,000) and therefore there is no amount to be adjusted.

However, since the company had adjusted its results in the previous tax year (2014) by € 4,800,000 and therefore had not deducted that amount for tax purposes, in the 2015 tax year it is entitled to carry the sum of € 1,000,000 forward to be deducted, which is 50% of the EBITDA above the surplus interest expenses in the relevant tax year. The remainder of € 3,800,000 (€ 4,800,000 – € 1,000,000) will then be carried forward -without any time restrictions- to subsequent tax years to be deducted from gross income in those years.

Note that in the case of affiliated undertakings, these provisions will apply once the provisions of Article 50 ICT on compliance with the arm’s length principle have first been observed.

The rules do not apply for interest expenses paid or credited by credit institutions, leasing companies established under Law 1665/1986 and factoring companies established under Law 1905/1990 which operate under the authorisation of the Bank of Greece, and similar regulatory authorities in other Member States of the European Union.

Moreover, the provisions of Article 72(9) (c) of Law 4172/2013, as in force, state that the provisions of Article 49 do not apply to interest expenses paid or credited by special purpose vehicles, only to the extent that they relate to implementation of public works or the provision of public services under a concession agreement, within the meaning of Presidential Decrees 59/2007 and 60/2007, which have been ratified by law, or via Public Private Partnerships (PPP) under the provisions of Law 3389/2005, which were entered into before 31.12.2014.