Thin capital rules are no longer in force. Their substitute is an “interest
limitation” restricting the deductibility of the negative interest margin (surplus
of interest expense over the interest income) to 30% of the total net earnings
before interest, taxes on income, depreciation and amortisation (EBITDA).
This limitation does not apply where the negative interest margin for the year is no
more than €3,000,000, or where the company is not part of a group. There is
also an exemption where the interest paid to any one shareholder (of more than
25%) is not more than 10% of the negative interest margin and the equity to
gross assets ratio of the company is no more than two percentage points below
that of the group. This demonstration is to be based on financial statements
under IFRS consistently applied. The accounting principles of any member
state of the EU, or – as a last resort – US GAAP may be taken in place of IFRS if
more relevant in the circumstances.
The interest limitation rules extend to related parties of shareholders and to
third party lenders with rights of recourse to a shareholder or his related party.
Back-to-back financing is a particular target of these caveats.