Recapture - general rule

The German interest capping rule restricts the deductibility of 'net interest expenses' to 30% of an entity's EBITDA. Typically, 'net interest expenses' state the difference between the interest costs borne and the interest income generated by an entity. This regulation is generally applicable when net interest expenses surpass €3 million. Nonetheless, there are specific exceptions, such as for standalone entities and group entities, provided certain criteria are met.

Interest expenses and income – broader definition

The amendments to German tax legislation at the end of 2023 included a new definition of the terms 'interest expense' and 'interest income' and extended those terms, e.g., to include 'economically equivalent expenses and other expenses related to the procurement of debt capital' in the expense term. However, the German Act only refers generically to the ATAD for the definition of the new terms and what they cover. To clarify this, the new updated guidelines address the definition and state what is now, without any further doubt, covered by the terms, e.g.,

• Imputed interest on instruments such as convertible bonds and zero-coupon bonds,
• Amounts under alternative financing arrangements, such as those practiced by Islamic banks,
• Guarantee fees for financing agreements,
• Brokerage fees,
• Early repayment penalties,
• Commitment interest,
• Guarantee commissions (guarantee fees) paid in connection with a loan,
• Fees payable to the syndicate leader for the ongoing administration of a syndicated loan or the loan collateral provided (arrangement fees, agency and security agency fees),
• Similar expenses, etc.

The expanded definition of interest expense now clearly establishes that financing costs – in both the narrow and broad sense – should always be considered and reviewed within the scope of the interest capping rule.

Conversely, it is defined that all items representing interest expense or similar expenses must now be treated as interest income on the recipient's side.

Temporal and scope application

The new interest deduction limitation guidelines are applicable to financial years starting after 14 December 2023 and ending after 1 January 2024. The previous guidelines will remain applicable for previous financial years, which started after 25 May 2007, and ended after 1 January 2008.

The updated guidelines maintain the same scope as the old ones, e.g., income tax group entities still qualify as one entity for interest deduction limitations; however, the update introduces more detailed provisions. They clarify that, e.g., a permanent establishment located in another country precludes a certain exception (so-called 'stand-alone clause') and that for corporations with German limited tax liability, all German permanent establishments are considered as one entity for the purposes of the interest capping rule.