The Dutch Ministry of Finance has launched a public consultation about the revision of certain statutory limitations on the deductibility of interest for Dutch corporate income tax purposes. The main purpose of the proposed revisions is to fix a number of perceived loopholes which would restrict what is often considered the excessive leveraging of acquisitions of Dutch companies by private equity investors. These proposals were issued in response to a critical report published by two members of parliament. Other more fundamental non-tax proposals set out in this report are not addressed in the public consultation. Interested stakeholders can submit their input or propose amendments to the draft bill until 18 July.
In general, interest payments made by a Dutch corporate taxpayer are deductible from its taxable income. Interest deduction is subject to a number of statutory restrictions set out in the Dutch tax law. These restrictions are summarised in the following client memo: “Interest deductions in the Netherlands“. The public consultation proposes to amend two of the statutory restrictions.
The first statutory provision to be consulted on is an anti-base erosion rule that applies to intra-group financing only. Pursuant to this rule, interest paid to a related party is in principle non-deductible if the loan was attracted in connection with a tainted transaction. This includes an acquisition by the taxpayer or by certain related entities of a company that becomes a related entity after the acquisition. The interest is, however, deductible if the taxpayer proves that both the transaction and the financing were entered into for valid business reasons or if the interest is subject to an effective tax rate of 10%.
The second statutory provision to be consulted on is a limitation on acquisition debt financing. This rule limits the deduction of interest on “excessive” acquisition debt from the taxable profits attributable to a Dutch target company. Subject to this rule and certain other limitations, creating the possibility to offset interest on acquisition debt against the taxable profits of a Dutch target is typically fairly easy to achieve by using a Dutch acquisition vehicle. That vehicle either forms a fiscal unity or merges with the Dutch target on or shortly after the acquisition. The limitation in respect of acquisition debt financing is not limited to related-party debt, but also extends to third-party debt.
Whether acquisition debt is excessive is determined on the basis of a loan-to-purchase price ratio. In the year of the acquisition, a maximum loan-to-purchase price ratio of 60% is allowed; this maximum percentage is reduced by 5%-points annually over the course of seven years, down to 25% in year eight and subsequent years. Acquisition debt interest is not deductible from the Dutch target’s taxable profits to the extent that the actual loan-to-purchase price ratio exceeds the acceptable ratio (that is, 60% in year one to 25% in year eight). A de minimis threshold of EUR 1 million applies.
In August 2015, two members of Dutch parliament published the Initiative Policy Document Private Equity: A halt to excesses. This policy document provides twelve measures to halt what they perceive to be excesses in the private equity sector. The Dutch Ministry of Finance responded to the policy document in December 2015 and emphasised the importance of private equity firms for Dutch businesses. With respect to most of the proposals, the Dutch Ministry of Finance did not agree that amendments to existing law are necessary at the moment. This means that no amendments are currently expected in this respect. The Dutch Ministry of Finance did, however, endorse three technical proposals regarding the deductibility of interest payments. These proposals were published in June 2016 and the intention is for the changes to take effect as from 1 January 2017.
The main proposed changes to the interest limitation provisions
Interested stakeholders can submit their input or propose amendments to the draft bill until 18 July.
17 September 2020
24 March 2020
13 March 2020
17 December 2019
15 October 2019
15 October 2019
15 October 2019
15 August 2019
16 July 2019
17 May 2019