The interest barrier – the elephant in the room!
This costly inefficiency is often concealed by the formation of DTAs!
Our analysis of the annual reports of German listed companies revealed that the negative effects of the #InterestBarrier affect far more companies than one might expect.
These companies are unable to fully deduct their interest expenses for tax purposes, which increases their actual tax liability.
At least the non-deductible interest can be carried forward indefinitely as a so-called interest carryforward. This carryforward could potentially be utilized in the future if financing conditions change... which, for example, will rarely happen by definition in the case of LBOs.
What is surprising is that the current effective tax rate of these companies often does not appear elevated despite the interest barrier.
One reason for this may be that the future tax reduction potential of the interest carryforward has been recognized as an asset (deferred tax asset, DTA), provided that utilization within the next – typically 5 – years appears probable.
🔹 This recognition conceals the negative effect of the interest barrier in the P&L.
🔹 However, the currently increased cash tax burden is not avoided – the liquidity is gone for now, as the cash flow statement reveals.
Dear CFOs,
Dear Treasurers,
👉 The interest barrier is not an inevitable fate!
The solution is straightforward:
👉 Shift your financing mix more strongly towards leasing!
Let's talk!
The elephant is often still in the room, even if it is well hidden in many financial statements!
#PrivateEquity #CFO #Treasury
The Interest Barrier – the Elephant in the Room!
