The law restored EBITDA. The deduction still shrank.
Interest deductions depend on how income is defined. If the definition changes, the deduction changes too.
The 2025 tax law made this change. It brought back a more generous calculation, but then reduced the base it applies to.
This is not just a tax cut or increase. Instead, it changes where companies choose to put their debt.
The Event
Congress kept the §163(j) limit at 30% of adjusted taxable income and brought back the EBITDA standard after years of complaints from capital-heavy industries. On its own, this would have increased interest deductions.
At the same time, the law left out important types of foreign income from the calculation. Subpart F income and “net CFC tested income” are no longer included in the income base for the deduction.
The calculation is straightforward. Thirty percent of a smaller number means a smaller deduction. For companies with substantial foreign earnings, this exclusion can be more significant than the benefit of using EBITDA.
Companies have not made quick changes yet. However, tax departments are now asking a new question: If foreign income cannot support U.S. interest deductions, should the debt be placed elsewhere?
The Real Driver
The change does not affect interest directly. Instead, it changes the denominator in the calculation.
Before 2025, foreign earnings could be added to the income used to cover interest expenses. This made borrowing in the U.S. more efficient for multinational companies.
The new rule breaks this connection. Foreign income still exists, but it no longer helps with the U.S. deduction. This creates a mismatch. The cost of debt is still global, but the tax benefit is now limited to the U.S.
When this happens, where the debt is located matters more. It becomes something companies need to plan for.
Now, companies have a clear limit. Interest deductions are only available where there is enough domestic income. If domestic income is low, some interest deductions may not be available.
This is why experts say borrowing in the U.S. has become more expensive. The after-tax cost goes up because the deduction is now harder to use.
The Pattern
When tax rules separate income from deductions, behavior reorganizes around geography. In this case, the rule separates foreign income from U.S. interest deductions. As a result, companies are likely to match their debt with the income that can support it.
This leads to two main strategies. The first strategy is to move debt. A foreign subsidiary borrows in its own country and uses its local income to cover interest. This brings back the matching that the U.S. rule took away.
The othThe other strategy is internal lending. A U.S. parent company borrows money and then lends it to its foreign subsidiaries at a higher rate, creating interest income in the U.S. to support its own deduction. strategies try to fix the same issue. The tax system broke the link between where income is taxed and where deductions can be used.
The rule did not eliminate interest deductions. It just made their use depend on where the income is located.
Implications
The burden does not go away. It just moves to a different place.
Companies with substantial foreign earnings and limited U.S. income are most affected. Their deductions are limited, even if they are very profitable overall.
As a result, debt moves more easily between countries. But this flexibility brings new costs. Borrowing abroad raises transfer pricing questions, such as whether a U.S. parent should be paid for guaranteeing the debt. It also means companies must follow local interest limitation rules, which can be stricter than those in the U.S.
So, the system replaces one limit with another. It makes it harder to use foreign income in the U.S. and pushes companies into setups that tax authorities watch more closely.
The pattern is clear. The law narrows the base, companies adjust their structures, and enforcement risks increase.
Lessons for Practitioners
Interest limitations depend as much on the definition of income as on the percentage cap
Excluding foreign income from the base effectively localizes deductions
Debt location becomes a tax variable once deductions cannot travel with global income
Internal lending structures are a response to stranded deductions, not an aggressive starting point
Transfer pricing risk increases when debt is moved or replicated across entities
Human Element
Tax departments are responding to a new rule that changed the economics of borrowing, not acting based on ideology. When the deduction no longer aligns with income, they change their structure until it does again.
Forward View
The proposed legislative fix would again include global income in the calculation. This would bring back the previous alignment between income and deductions.
But the main pattern will stay the same. Any rule that limits the income base will prompt companies to reconsider where to allocate their deductions.
If Congress changes the rule again, companies will change their structures too. Their behavior depends on the constraint, not the exact rule.