Greece introduced the new earning stripping rules limiting the deduction of interest expenses from 1 January 2014 which were subsequently amended in the years 2016 and 2017. The amendments include that the deduction of interest expense is limited to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA), with a safe harbor of EUR 3 million which is in line with the EU Anti-Tax Avoidance Directive (ATAD).
On 11 January 2021, Greece published Circular Ε. 2004 of 11 January 2021 wherein it is clarified that effective 1 January 2019 the limitation rule applies to excess borrowing costs instead of excess interest expense. Thus, the deductibility of excess borrowing costs is now restricted to the higher of 30% of EBITDA or a EUR 3 million safe harbor. The borrowing costs exceeding the limits can be carried forward indefinitely for deduction in future years.
The circular further provides the following:
- Excess borrowing costs means the amount of deductible borrowing costs exceeding taxable interest income and other financially equivalent taxable income received, with borrowing costs including interest expense for any form of debt, other expenses financially equivalent to interest, and expenses arising from the raising of financing, including any interest that is capitalized and the cost of loans;
- Interest expense does not include any interest imposed for violating the tax legislation and interest income (including for EBITDA purposes) does not include exempt income;
- The limitation applies at the level of individual legal entities, whether or not they belong to a group, and transactions with other persons in the same group must be taken into account in calculating both the excess borrowing costs and EBITDA (see group escape rules below); and
- With respect to corporate divisions or any restructuring, non-deductible excess borrowing costs will be transferred to the receiving company based on the provisions of the division or restructuring agreement.
Effective 28 March 2022, Greece introduced group escape rules in line with the ATAD, which include that if a taxpayer is a member of a consolidated group for accounting purposes according to the accounting standards, the taxpayer is allowed to:
- Fully deduct the excess borrowing costs if the percentage (ratio) of its share capital to total assets is equal to or higher than the equivalent ratio of the group, or lower by at most two percentage points, and all the assets and liabilities are valued using the same method as in the consolidated financial statements; or
- Deduct the excess borrowing costs at an amount that exceeds the amount they would be entitled to under the standard 30% of EBITDA limit, with the higher amount calculated as follows:
- the group ratio is determined by dividing the group's excess borrowing costs with third parties by the group's EBITDA; and
- the group ratio is multiplied by the EBITDA of the taxpayer to calculate the deductible amount.
The following are excluded from the interest deduction limitation rules:
- Financial undertakings which include credit institutions, insurance undertakings, reinsurance undertakings, etc. However, the exemption provided to certain companies under the prior rules are no longer available, including leasing companies and business receivables agency companies; and
- Excess borrowing costs incurred from 1 January 2019 onwards, arising from third-party loans used to finance qualifying long-term public infrastructure projects, regardless of the date of conclusion of the relevant contract.
In addition to the EBITDA interest barrier, the deductibility of interest expenses may be disallowed if the interest expense does not meet the general test for deductibility of business expenses, including that the expense is incurred for the production of taxable income, is contracted in the ordinary course or interest of the business, corresponds to an actual transaction conducted at market conditions and is properly recorded in the books and substantiated by adequate documentation. One of the consequences of the deductibility tests is that interest on loans contracted to acquire a participation would not be deductible if the dividends from such participation qualify for the participation exemption.