Netherlands - 05 June 2012
New restrictions proposed on participation financing
By Pie Geelen, Jochem Temmerman and Aart Nolten
The Netherlands Ministry of Finance published proposed rules on 4 June 2012 that would disallow the deductibility of interest for companies that have “excessive" debt in relation to their participations. If approved, the rules would become effective on 1 January 2013, and are expected to provide the Dutch state with budgeted additional income from taxation of EUR 150 million.
The proposed restrictions on interest deductibility are designed to address what is known as the “Bosal gap.” As a result of the European Court of Justice in the Bosal case, in which the Court held that the Dutch provision disallowing a deduction for costs incurred in connection with a foreign participation was in conflict with EU law, interest costs relating to participations are, in principle, deductible.
Under current rules, interest on debt relating to a participation is, in principle, deductible for Dutch corporate income tax purposes, whereas dividend income from a (qualifying) participation is not considered taxable income. To repair this mismatch, it is proposed to limit the deductibility of interest (and related costs) for companies that have excessive debt compared to the value of their participations. The new rules would apply to intragroup and external (third party) debt, as well as Dutch and non-Dutch participations.
The proposed legislation includes a specific calculation method to determine whether a company is “excessively” leveraged. There is no requirement of a direct link between the debt financing and a specific participation. If and when the combined acquisition price for all participations held by the company exceeds its equity (for tax purposes), the company would be deemed to have financed the participations with debt for the excess. The interest (and related costs) on the excess participation financing, in principle, would not be deductible under the new rules.
For practical reasons, the first EUR 1 million of interest expense would not be affected by the new rules. In addition, a specific exemption is proposed to prevent the rules from limiting the deductibility of interest in relation to participations (or an extension of participations) in operational companies. Although the proposed rules could limit deductibility in relation to the debt financing of intragroup reorganizations, this exemption should allow interest and financing costs in relation to operational investments to remain deductible. However, the exemption would not apply in certain cases, e.g. hybrid financing provided to the participation, double dip structures and/or tax planning structures aimed at tax avoidance.
Other interest deduction limitations
The proposed rules include specific measures to prevent interference with the existing interest deduction limitations. Although it is indicated that the current limitations will remain in force, the Ministry of Finance is considering abolition of the thin capitalization rules. This will depend on whether the negative budget impact of the abolition (EUR 30 million) can be offset by other measures.
There are some uncertainties on the impact of the new rules and the proposals may be subject to further amendment during the legislative process. However, there appear to be structuring alternatives available to mitigate the potential impact of the proposed new rules.