The deduction of interest may be restricted under a number of rules, including earnings stripping rules, (modified) thin-capitalization rules and maximum interest rates.
Earnings Stripping Rule
A new earnings stripping rule limiting the deduction of interest expenses was implemented in Monaco effective 1 January 2019.
Under the new rules, the deductibility of interest expenses on all types of indebtedness (regardless of whether the borrower is a shareholder or a third party or a resident or a non-resident) for a given fiscal year is limited to the highest of the following amounts:
- EUR 1 million; or
- 30% of EBIDTA.
The excess non-deductible portion of the interest expense can be carried forward indefinitely, while the excess borrowing capacity for the year may be carried forward for 5 years.
Thin-Capitalization Rules
There are no thin-capitalization rules but in the event of thin-capitalization, a more restrictive iteration of the earnings stripping rule above applies. Indeed, the deduction cap is lowered to 10% (instead of the standard 30%) of EBITDA if the interest expense is paid to related parties and the debt owed to such related parties exceeds for the year 150% the equity of the borrower. Likewise, excess non-deductible interest in this scenario may be carried forward indefinitely but for one third of its amount (instead of fully otherwise). Finally, any excess borrowing capacity for the year is forfeited (instead of carried forward for 5 years otherwise).
Two parties are deemed to be related for these purposes if:
- One of them holds, directly or indirectly, the majority of the share capital of the other, or exercises a power of decision on the other; or
- Both of them are controlled by the same third party, as mentioned above.
In addition to the more restrictive iteration of the earnings stripping rule above, interest paid by a company to its direct controlling shareholders on the portion of the loan exceeding 50% of the amount of the share capital of the borrower company is not deductible (see Sec. 6.4.).