In a tax-related context, an interest barrier is a mechanism used to limit the amount of tax deductions that a company can claim on its interest expenses. An interest barrier provision specifies a maximum amount of interest expense that can be deducted in a given period.
The primary purpose of an interest barrier is to prevent companies from using excessive debt to reduce their taxable income. By limiting the amount of interest expense that can be deducted, an interest barrier makes it more difficult for companies to use debt and shareholder loans to minimize their tax payments.
Interest barriers can take various forms, but they usually involve a calculation that compares the amount of interest paid by the company to a specific percentage of the company's EBITDA – in the above example, this is calculated as 30% of EBITDA in row 791. If the amount of interest paid exceeds the limit set by the interest barrier, the excess amount is not tax-deductible. This can lead to higher tax liabilities for the company.
In some jurisdictions, the absolute annual amount of interest expense deductible may also apply. The SHL & debt interest barrier switch is on in the above example and set at EUR 1,000,000 per annum. This amount will depend on what barrier may be applicable in the respective project’s jurisdiction. The model also offers flexibility to differentiate between debt interest, SHL interest, and overall interest expense from debt and SHL for the interest barrier calculation—the inputs for which are selected in the Inputs_TI sheet.
How to consider an interest rate barrier within a financial model for renewable energy investments?
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