RECENT TAX DEVELOPMENTS IN
THE NETHERLANDS
Harmen van Dam
Marieke Bakker
Partner - Loyens & Loeff Rotterdam
Tel. + 31 10 224 63 48
E-mail: harmen.van.dam@loyensloeff.com
Partner - Loyens & Loeff Rotterdam
Tel. +31 10 224 62 53
E-mail: marieke.bakker@loyensloeff.com
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Contents
• Introductory remarks
• Consultation paper regarding:
– flexibilization of holding company regime
– introduction of special regime to attract group finance
activities
– overhaul of interest deduction limitations
• Budget 2010
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Introductory remarks
• Business taxation has attracted unusual political interest:
– Introduction of new regime for carried interest and excessive
payments to management
– Urge to further tighten interest deduction limitations for
acquisition debt (especially privat equity structures)
– Parliamentary questions regarding effective tax rate of Dutch
headquartered multinationals
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Consultation Paper June 2009
•
Three items:
1. Improvement of participation exemption
2. Introduction of 5% tax rate for group finance activities
3. Tightening of interest deduction limitation
•
Entry into force January 1, 2010 (?)
- Many comments and requests for amendments
- Introduction delayed or transitional rules?
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Consultation Paper – participation exemption
•
First item: Improvement of participation exemption
– Participation exemption historically cornerstone of Dutch
international tax policy.
– 2007 shift from more subjective approach (“intention test”) to
objective approach (asset and tax tests). Changes unintentionally
resulted in uncertainties.
– Proposal to re-introduce the pre-2007 “intention test”.
As a fall-back the asset and/or tax test may be used.
– Asset and tax test are amended.
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Consultation Paper – participation exemption
•
Intention test:
–
Exemption does not apply if held as “passive investment”, i.e. taxpayer’s
purpose is to obtain a return that may be expected from ordinary asset
management
–
If held for mixed purposes: determine where emphasis
–
Not a passive investment if held as part of the business: extension of
taxpayer’s business, holding and intermediate functions
–
Passive investment by nature: fiscal investment constitution, certain group
(re)insurance companies
–
Deemed passive investment:
• > 50% consolidated assets consist of shareholdings/ other interests
of less than 5%, or
• Participation, together with 5+% (in)direct subsidiaries, largely fulfils
“group financing function” (including also provision of operating
assets within group)
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Consultation Paper – participation exemption
•
Asset test
General:
- Participation passes the test if , generally, ≥ 50% of its assets are other
than non-business related passive investments
- Still requires allocation balance sheet, but test applies “generally” instead of
“continuously”. And allows occasional, short term drop below 50%
- If at least 70% of the assets of an entity are “good assets” than any passive
investments of that entity will be considered “good assets” as well
Three categories of passive investments
(i) Ordinary passive investments: assets are not, within reason, necessary in
connection with the business of the entity (e.g. excess cash, securities).
Exceptions:
- Assets income of which is subject to tax according to new subject-to-tax
test
- Immovable property - this is now a “good asset”, unless owned by a
fiscal investment institution or a tax exempt investment institution
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Consultation Paper – participation exemption
•
Asset test - categories of passive investments continued
(ii)
Intra-group loans; except:
- Assets the income of which is subject to tax according to the new
subject- to-tax test, i.e. effective rate of 5% (plus anti-balance sheet
stretching clause)
- Intra-group loans held by active group financing company
- Intra-group loans of which ≥ 90% funded using loans from third parties
(iii) Operating assets of which (rights of) use is granted to affiliated entities,
except:
- Assets, the income of which is subject to tax according to the new
subject-to-tax text
- Assets held by entity with active grant-of-use activities
- Assets of which at least 90% is funded using loans from third parties
Hybrid loans: loans effectively functioning as equity no longer eligible for the
participation exemption if included in the interest box
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Consultation Paper – participation exemption
•
Subject-to-tax test:
– Direct subsidiary is liable to pay profit tax with a “regular” rate of at
least 10%, which tax results in a “realistic levy” by Dutch standards
– Regular rate of at least 10%: refers to normal statutory rate. Small
in- or decreases of the rate not necessarily imply insufficient rate
– Realistic levy: specific Dutch tax rules appear less relevant to
determine degree of taxation liability
– Finance companies: compare to 5% rate of the Dutch interest box
– Different depreciation system acceptable
– No real taxation if e.g.: tax holiday, cost-plus approach to minor
taxable basis, deductible dividends, refund of CIT upon distribution,
overly generous participation exemption
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Consultation Paper – group interest box
•
Second item: Introduction of 5% tax rate for group finance activities –
interest box
Previously proposed interest box:
– Proposed to be effective 2007
– Available for all tax payers upon request
– Ceiling: equity times certain rate
– Forex results excluded from the box
– Entity into force postponed pending EU State Aid procedure
European Commission reluctant to approve the optional box. Dutch
authorities agreed to amend to mandatory interest box and expand
definition of “group”.
On July 8, 2009, European Commission approved mandatory interest
box.
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Consultation Paper – group interest box
•
Group interest is taxed/deductible at effectively 5%
•
Mandatory, per tax payer (or fiscal unity)
•
Group interest box items are also:
- Indirect group loans (back to back)
- Changes in value
- Hedging instruments
- Financing part of lease or rental installments
- Funds/short term investments reserved for acquisition
purposes (“war chest”)
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Consultation Paper – group interest box
•
Group companies:
- Control (in stead of 1/3 interest stake)
- Approach IAS 27
- Power to determine financial + operational policy
- Right to income/incurring risks
- Controlling rights of cooperating group are added
up (IAS 31)
- Family, joint venture, private equity structures
- Facts & circumstances test, not optional
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Consultation Paper – group interest box
•
‘Loans’ include agreements comparable to loan agreements: financial
lease and hire-purchase agreements.
•
Hybrid loan receivables included (currently: participation exemption)
•
Finance component of intra-group rental income with respect to fixed
assets also included.
•
Disqualifying: loans relating to intra group transfer of assets (not being
qualifying participations or group interest box assets), unless business
reason.
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Consultation Paper – group interest box
•
If group creditor financed group loan with external debt: group interest
box not applicable to group interest expense, i.e. deduction at 25.5%
- Loans must meet the ‘parallelity requirement’.
•
(Direct) external debt used to fund group interest box items: group
interest box applicable to interest expense on external debt, i.e.
deduction at 5%
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Consultation Paper – group interest box
•
Some observations:
- ”Mismatch” for companies that borrow from group and onlend
to/invest with third parties: income taxed at 25.5%, expense
deducted at 5%
- Indirect external debt deductible at 25.5% subject to the strict
requirement of “parallelity” – difficult to meet.
- Overlap other restrictions on deduction of interest
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Consultation Paper – interest
• Third item: Tightening of interest deduction limitations
Currently no restrictions for third-party interest, only for related party
interest:
• Anti-base erosion rules:
– Apply to interest connected with listed tainted transactions, such as
conversions of equity, contributions to subsidiaries or acquisitions of
subsidiaries.
– Unless taxpayer has business motive for both the transaction and
the funding structure.
– If creditor is taxed at 10%, burden of proof for tax authorities.
•
-
Thin-capitalization rules:
Allowed debt-to-equity ratios of 75% to 25%, or if
higher, ratio of consolidated group.
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Consultation Paper
•
Why changing the interest deduction rules?
Buy-Out
Fund
– Highly leveraged acquisitions by buyout firms:
• Deduction of interest under both
bank debt and shareholder debt.
• Thin-cap restriction does not
apply if fund is not part of
consolidated group.
• Base erosion restriction may not
apply in case of genuine
acquisition (business motive).
NL
Holding
Bank
NL
Target
– Existing mismatch:
• Interest under acquisition debt
deductible, but
• Connected income from foreign
subsidiary exempt.
NL
Holding
NL
trade
Bank
Foreign
Target
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Consultation Paper – interest deductions
•
Option 1: two measures
(i) Interest relating to participations
- Finance expense re participations and group interest box
items is not deductible insofar > € 250,000
- Disallowed amount: average tainted debt x total financing expense
average total debt
- Tainted debt is average book value of
a. participations + 20.5/25.5 of group interest box assets
minus
b. fiscal equity + losses + 20.5/25.5 of group interest box assets
So equity first allocated to participations and box assets
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Consultation Paper – interest deductions
(ii) Interest related to acquisitions and fiscal unity
- Finance expenses re the acquisition of a subsidiary that is
subsequently included in the fiscal unity: only deductable to
amount of acquiring company’s “own profit”
- Exceptions:
- expenses insofar < € 250,000
- fiscal d/e ratio < 3:1
- Carry forward of excess interest: 9 years
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Consultation Paper – interest deductions
• Option 2: Earnings Stripping
-
-
Interest not deductible if > 30% of EBITDA and
> € 250,000. Balance of all interest income and expense, whereby box
interest included for 5/25.5 and carry forward interest included
Carry forward of excess interest: 9 years
Exceptions:
- Taxpayer not part of group
- Commercial d/e ratio of tax payer is not
less favourable than that of group
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Budget 2010
• Changes in participation exemption as of 2010
• Nothing included on interest box and deductibility of interest
• Election for loss carry back for 3 years (instead of 1):
consequence carry forward restricted to 6 years (instead of 9)
• Royalty/innovation box effective tax rate to 5% and no longer a
cap
• Amendment dividend withholding tax (Norway/Iceland)
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