New Rules On Deductibility Of Interest Expenses

There has been a substantial softening in the rules governing the tax deductibility of interest expenses, including the thin capitalisation rules.

From April 2009, the thin capitalisation rule for related party loans returns the limit on debt/equity ratios to 4:1 (6:1 for banks and insurers). Since 2008, they had been 2:1 and 3:1 respectively.

This change will have a significant effect on tax-efficient structures used in corporate acquisitions and holdings. In particular, it will encourage companies to reduce equity holdings and increase their shareholder's debt in order to achieve the most tax efficient debt/equity ratio. A good way to do this would be to repay existing equity contributions made outside the registered capital.