Taxand Germany explains the new interest deduction ban on inbound acquisition structures.
When an inbound acquisition is financed, interest expenses can sometimes be deducted twice. The cause of such a ‘double dip’ is the German technique of taxing partnerships or their partners (so called ‘co-entrepreneurs’ [Mitunternehmer]) that take the entrepreneurial risk.
The German Bundesrat wanted to eliminate this double tax relief on interest expenses while the German Customs Code Amendment Act (Zollkodexanpassungsgesetz – ZKAnpG) was undergoing the legislative process in 2014. In the end, Parliament did not implement the Bundesrat’s proposal.
Now it seems to be having a second go at introducing a new interest deduction ban.
The deduction ban will not apply if the expenses reduce the same taxable person’s income that is taxable in the Germany and also proven to be subject to actual taxation in the other state (Sec. 4i sentence 2 ITA Bill). The Financial Committee wants to prevent the rule from overshooting the mark via the exemption clause. The rationale for the Bill mentions tax credit and lack of a DTT as exceptions.