The Finance Act 2018 introduced new earnings stripping rules limiting the deduction of interest expenses. Under the rules, the deductibility of interest charges on related-party loans is limited to the highest of the following amounts:
- Interest income received from related parties;
- Interest expenses on loans not exceeding the debt-equity ratio of 1:1.5; and
- Interest expense not exceeding 25% of EBITDA.
The above limitations do not apply to interest paid to a related party located in low-tax or a non-cooperative jurisdiction, and such interest remains non-deductible for corporate tax purposes.
The non-deductible portion of the interest can be carried forward and deducted in subsequent years, subject to certain conditions, including that the carried forward interest amount is reduced by 10% every year.
In addition to the earnings striping rule above, interest paid on shareholder loans is generally deductible only to the extent the interest rate does not exceed the Bank of Central African States (BEAC) rate plus two percentage points and provided that the capital of the debtor is fully paid-up.