The Dutch Ministry of Finance has released a bill proposing changes to Dutch corporate and dividend tax laws.
Five important topics are included in the legislative proposals, which, if adopted by Parliament, are expected to take effect as of January 1, 2012:
- Denial of interest deduction for excess debt-funded acquisition holding companies
- Abolition of the imputation of losses incurred by foreign permanent establishments at the level of a Dutch company
- Stressing the anti-abusive character of the Dutch substantial interest regime
- An anti-abuse provision subjecting certain distributions by cooperatives to dividend tax
- Expansion of R&D facilities
Restricting interest deduction for excess debt-funded acquisitions
With this proposed change, the Ministry of Finance intends to attack the interest deductions created when Dutch companies are acquired by (foreign) investors using excessive debt funding (group and third-party loans). In these transactions, a debt-funded Dutch holding company is often used to acquire a target. Subsequently, a fiscal unity is formed between the holding company and the target. The interest expenses can then be offset against the operating profits of the target, creating a Dutch tax base erosion.
In a number of cases, these loans are considered excessive, and, in practice, cases are known in which the debt of the acquiring holding company is so extensive that the taxable profits of the acquired company are either largely reduced or disappear altogether.
The government has now proposed to introduce an interest deduction restriction for these acquisition holding companies and for situations whereby acquirer and target enter into a legal (de)merger with the acquirer as a result of which the assets of the target company and the acquisition loan are held by the same entity.
The restriction is designed to eliminate the excessive interest deduction, while at the same time sparing realistic debt/equity ratios. The restriction will ensure that the interest expenses of the acquisition holding company relating to an acquisition can no longer be offset against the profits of the acquired company by using the fiscal unity regime, but only against the acquisition holding company's "stand alone" profits (which are often nil). The interest deduction restriction will apply to both group interest and third-party interest.
The limitation of interest deduction only applies to the lower of (1) annual interest expenses in excess of €1 million or (2) annual interest expenses on excess debt (i.e., debt/equity ratio of the fiscal unity exceeds 2:1). In order to determine the equity for the purpose of the 2:1 ratio, the book value of participations that are not part of the fiscal unity and to which the participation exemption applies will be subtracted from the equity amount. Moreover, the so-called goodwill gap that results from the formation of a fiscal unity, and basically leads to a decrease of the equity, will be repaired. An amount of goodwill that was originally included in the value of the shares of the subsidiary may be added to the equity upon formation of the fiscal unity. This added amount will be written off in 10 years on a straight-line basis.
A grandfathering rule is proposed to exempt acquisitions made before January 1, 2012.
Abolition of loss imputation of foreign permanent establishments
Under current legislation, a Dutch company with a foreign permanent establishment (PE) can impute the losses made by the PE and as such reduce the Dutch tax base. Any profits of the PE that arise in later years are subsequently not exempt at the level of the Dutch company until the amount of the imputed losses is fully recaptured.
This mechanism deviates from the mechanism applied to a participation of a Dutch company to which the participation exemption applies. The participation exemption does not only exempt dividends and capital gains; losses are, in principle, not deductible either (exceptions do apply to, e.g., a liquidation loss).
The government has now proposed an alignment of both mechanisms by abolishing the imputation of losses made by foreign permanent establishments. These rules would only apply to active PEs. A credit mechanism will apply to passive PEs. Furthermore, when losses of PEs can be considered definitive these losses will become imputable insofar as these losses are not recognized in the PE's country.
Limitation of the substantial interest regime
On September 30, 2010, the European Commission requested the Netherlands to change the Dutch substantial interest regime because it was deemed to be in breach of EU law, because mainly foreign shareholders are affected by this regime. This regime often implies taxation of capital gains and/or dividends received by foreign shareholders who are not considered to hold these shares as a business asset.
In order to align the regime with EU principles that allow for legislation aimed at preventing specific abusive situations, it is proposed to both limit the circumstances under which a non Dutch resident entity is subject to corporation tax in respect of an interest in a Dutch resident entity and to stress its anti-abusive character. Next to the condition that the shares are not held as a business asset, a new condition is introduced, stating that shares should be held with the main objective (or one of the main objectives) to avoid Dutch income tax or dividend withholding tax. If both conditions are fulfilled, the substantial interest regime is applicable. If the shares are held as a business asset, this regime will still not be applicable.
The Ministry of Finance proposes to levy dividend withholding tax on dividends distributed by cooperatives that can be considered to be part of abusive structuring.
Under current rules, cooperatives are not subject to dividend withholding tax. As a main rule, this will not change. However, an exception could be made for structures that the Dutch government considers abusive. In line with the anti-abusive character of the substantial interest regime, it is proposed that if the membership rights in a cooperative can be considered to be held as a business asset, then the members of the cooperative are not subject to Dutch dividend withholding tax.
Expansion of R&D facilities
Furthermore, the draft bill announces a new facility for companies that engage in R&D activities, which should create an extra deduction of costs that directly relate to R&D. At this stage, it is uncertain how this facility will be designed and when it will be effective.
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