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Proposal on new rules for participation financing

Belastingadvies Deloitte

The Dutch Ministry of Finance previously announced additional rules on interest deduction, to repair of the so-called Bosal gap. Today the proposed rules have been published, to become effective as of 1 January 2013. The intention of the new rules is to deny interest deductibility on ‘excessively’ leveraged participations. This should provide the Dutch State with budgeted additional income from taxation of  € 150 million.

Outline

Under the current rules, interest on debt financing of a participation should in principle be deductible for Dutch corporate income tax purposes, whereas the income from (qualifying) participations should not be considered taxable. To repair this mismatch, it is proposed to limit the deductibility of interest (and related costs) on ‘excessively’ leveraged participations. The new rules should apply to both intragroup and external (third party) debt as well as both Dutch and non-Dutch participations.

To assess whether participations are ‘excessively’ leveraged, a specific calculation method is included in the proposed legislation. 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 will be deemed to have financed the participations with debt for the excess. The interest (and related costs) on this so-called excess participation financing will in principle not be deductible under the new rules.

For practical reasons an initial amount of € 1 million of interest expenses will not be affected under the new rules. In addition, a specific exemption is proposed to prevent the new rules from limiting the interest deductibility in relation to participations in (or extension of participations in) operational companies. Although the new rules could limit the deductibility in relation to debt financing of intragroup reorganisations, this exemption should allow interest and financing cost in relation to operational investments to remain deductible.

For completeness sake we note that under specific conditions the exemption will not apply, e.g. in case of hybrid financing provided to the participation, double dip- and/or tax planning structures (aimed at tax avoidance).

Other interest deduction limitations

The proposed new rules include specific measures to avoid potential interference with existing interest deduction limitations. Although it is indicated that the current limitations will remain in force, the Ministry of Finance is considering the abolishment of the existing thin capitalisation rules. Whether these will indeed be abolished, depends on whether the negative budget impact of such abolishment ( €30 million) can be repaired through other measures.

Actions to be taken

Currently there are still some uncertainties on the impact of the new rules and the proposals may be subject to amendment in the further legislative process. However there appear to be structuring alternatives available to mitigate the potential impact of the proposed new rules.

Your local Deloitte contact person would behappy to advise you further on this or you can contact us at NLtaxnews@deloitte.nl

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