ICC Document & publication

ICC Policy Statement – Limitations of deductions of interest payments (2012)

Limitations of deductions of interest payments (February 2012)

The international business community would welcome a more favourable tax treatment of equity financing, thus reducing or eliminating the difference in the tax treatment of debt and equity-financed investments.

However, the trend that is experienced by international business so far is that tax deductibility of interest is limited, but at the same time does not provide relief for equity financing or interest received. With the tax avoidance argument, an increasing number of countries have introduced restrictive limitations of interest deductions without providing any relief for equity financed investments. This has resulted in an increase of the cost of capital for investments. Furthermore, adequate income tax relief for non-deductible interest received from local and/or foreign affiliates has not been granted. It is of utmost importance to ensure that such legislative measures are targeted to not infringe upon conventional business transactions, which would ultimately result in double taxation. Consequently, ICC strongly recommends that the limitations of interest deductions be applied only to truly abusive cases.

Legislative changes towards a CBIT system lead to double taxation if not properly combined with tax relief at the level of the recipients of the interest and dividends. On the international level, the risk of double taxation increases substantially by legislative actions that limit tax deductibility of interest. Therefore, ICC urges legislators to avoid taking actions which are detrimental to international business and the free movement of capital.


  • ICC notes that differences in the tax treatment of equity and debt financing have a potentially significant impact on investment decisions This may have been a contributory factor to overleveraging in some economies.
  • In order to remove this distortion, ICC recommends that Governments consider introducing Allowance for Corporate Equity – an approach which has already been adopted by a small number of countries.
  • n alternative theoretical approach is to eliminate tax deductions for interest expense. Given the preponderance of countries that allow a level of deduction for interest expense this would be a radical move and would be unlikely in practice to stimulate growth and international development.
  • In making any changes Governments should be careful not to artificially restrict the deductibility of debt interest. This is especially important given the potential impact on existing business models and long-term investments.
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