When structuring MIPs in the Netherlands, many technical tax issues require careful consideration. One of these issues relates to the interest rate that must be applied in the case of employee financing to participate in an MIP and purchase equity. This is relevant because a non-market interest rate may be considered a taxable benefit in kind, which is subject to payroll or income tax.
On 14 February last, the Dutch tax authorities published useful practical guidance in the form of a position from their so-called knowledge group on this matter. This represents the official policy of the Dutch tax authorities, which is binding upon them and may be relied upon by taxpayers from the date of publication.
According to the knowledge group, relevant elements to determine the market interest rate are, for example: (i) usage of the loan (purchase of shares belonging to box 3 or box 1 (lucrative interest), purchase of a basket of ordinary shares and cumulative preference shares), (ii) interest rate, interest payment (single or compounded on exit), (iii) term, (iv) repayment (linear, annuity, or restricted (dividend distribution or on exit)), and loan-to-value ratio.
The practical guidance offered is as follows:
Loans with a principal under EUR 75,000: the interest rate should be the lower of either the rate for a third-party personal loan or a securities-based loan.
Loans with a principal over EUR 75,000:
- Loan-to-value up to 70%: the interest rate should align with that of a third-party securities-based loan.
- Loan-to-value of 100%: the interest rate should be based on the expected risk and return of the financed equity instrument(s).
- Loan-to-value >70% <100%: the interest rate should be determined by a specific formula.
The guidance mentions that, in general, it only applies to payroll tax and income tax but may also be followed for corporate income tax and dividend tax when assessing whether the interest is non-businesslike.
Although this guidance is helpful, it makes it clear that taxpayers may still use different methods as long as they can justify the interest rate based on the loan terms and the taxpayer's individual financial position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
