Financing & treasury
Interest limitation rules
Interest limitation rules cap the amount of net interest expense a company can deduct for tax purposes, typically as a percentage of earnings before interest, tax, depreciation and amortisation, applying regardless of whether the interest rate itself is arm's length, and operating alongside rather than instead of transfer.
These rules, exemplified by measures introduced under the EU's Anti-Tax Avoidance Directive and similar regimes elsewhere, target base erosion from excessive leverage rather than mispriced individual loans, meaning a perfectly arm's length rate on an intercompany loan can still result in a disallowed interest deduction under.
Groups must therefore model both tests together: whether the rate itself is arm's length, and whether the resulting interest expense fits within the applicable earnings-based limitation, since satisfying one does not guarantee compliance with the other, and both analyses should feed into the same overall financing structure.
In practice
What matters when applying interest limitation rules
- Model both arm's length pricing and earnings-based caps together
- Check the applicable EBITDA percentage in each jurisdiction
- Consider carry-forward rules for disallowed interest
- Review group ratio or safe harbour exemptions available
- Reassess as earnings and debt levels change year on year
Frequently asked
Common questions
Do interest limitation rules replace transfer pricing?+
No. They apply alongside transfer pricing rules, capping deductible interest based on earnings regardless of whether the underlying rate is arm's length, so both tests need separate consideration.
What triggers these rules typically?+
Net interest expense exceeding a set percentage of EBITDA, often around thirty percent under EU and comparable regimes, with variations, safe harbours and carve-outs depending on the specific jurisdiction.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.