Interest limitation rule

Interest is deductible against taxable profit, which is what makes debt tax advantaged. Most European jurisdictions now limit that deduction. The Anti Tax Avoidance Directive requires member states to cap the deduction of net borrowing costs at around 30% of tax EBITDA, with a de minimis threshold that may be set at up to three million euro, and the United Kingdom's corporate interest restriction takes the same form with a two million pound allowance. Implementations differ across member states, including the treatment of groups and the rules on carrying disallowed amounts forward, so the local position has to be checked rather than assumed.

The important consequence is where the cap bites. It does not reduce the shield proportionately across the structure. It removes it from the marginal turn of leverage, because the first turns of interest fit inside the allowance and the last ones do not. So the after tax cost of the debt a sponsor is deciding whether to add is closer to the full coupon than the headline tax rate suggests.

Carry forward softens it without solving it. A disallowed amount that can be used in a later year is worth something only if the company has spare capacity later, which a company that levered to the cap generally does not until it has deleveraged. Treating a carried forward disallowance as if it were the same as a current deduction overstates the value of the shield.

It is also a useful point of contrast in a European interview. American guides raise a comparable federal limitation, and the destination is broadly similar while the mechanics, thresholds and group rules are not. Saying that the deduction is capped, naming roughly where, and adding that the detail is jurisdiction specific is a better answer than treating deductibility as unlimited.