RECENT TAX DEVELOPMENTS IN THE NETHERLANDS

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RECENT TAX DEVELOPMENTS IN THE NETHERLANDS
Harmen van Dam Partner - Loyens Loeff
Rotterdam Tel. [phone] E-mail
harmen.van.dam_at_loyensloeff.com
Marieke Bakker Partner - Loyens Loeff
Rotterdam Tel. [phone] E-mail
marieke.bakker_at_loyensloeff.com
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Contents

• Introductory remarks
• Consultation paper regarding
• flexibilization of holding company regime
• introduction of special regime to attract group
  finance activities
• overhaul of interest deduction limitations
• Budget 2010

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Introductory remarks

• Business taxation has attracted unusual political
  interest
• Introduction of new regime for carried interest
  and excessive payments to management
• Urge to further tighten interest deduction
  limitations for acquisition debt (especially
  privat equity structures)
• Parliamentary questions regarding effective tax
  rate of Dutch headquartered multinationals

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Consultation Paper June 2009

• Three items
• 1. Improvement of participation exemption
• 2. Introduction of 5 tax rate for group finance
  activities
• Tightening of interest deduction limitation
• Entry into force January 1, 2010 (?)
• - Many comments and requests for amendments -
  Introduction delayed or transitional rules?

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Consultation Paper participation exemption

• First item Improvement of participation
  exemption
• Participation exemption historically cornerstone
  of Dutch international tax policy.
• 2007 shift from more subjective approach
  (intention test) to objective approach (asset
  and tax tests). Changes unintentionally resulted
  in uncertainties.
• Proposal to re-introduce the pre-2007 intention
  test. As a fall-back the asset and/or tax test
  may be used.
• Asset and tax test are amended.

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Consultation Paper participation exemption

• Intention test
• Exemption does not apply if held as passive
  investment, i.e. taxpayers purpose is to obtain
  a return that may be expected from ordinary asset
  management
• If held for mixed purposes determine where
  emphasis
• Not a passive investment if held as part of the
  business extension of taxpayers business,
  holding and intermediate functions
• Passive investment by nature fiscal investment
  constitution, certain group (re)insurance
  companies
• Deemed passive investment
• gt 50 consolidated assets consist of
  shareholdings/ other interests of less than 5,
  or
• Participation, together with 5 (in)direct
  subsidiaries, largely fulfils group financing
  function (including also provision of operating
  assets within group)

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Consultation Paper participation exemption

• Asset test
• General
• - Participation passes the test if ,
  generally, 50 of its assets are other than
  non-business related passive investments
• Still requires allocation balance sheet, but test
  applies generally instead of continuously.
  And allows occasional, short term drop below 50
• If at least 70 of the assets of an entity are
  good assets than any passive investments of
  that entity will be considered good assets as
  well
• Three categories of passive investments
• (i) Ordinary passive investments assets are
  not, within reason, necessary in connection with
  the business of the entity (e.g. excess cash,
  securities).
• Exceptions
• - Assets income of which is subject to tax
  according to new subject-to-tax test
• - Immovable property - this is now a good
  asset, unless owned by a fiscal
  investment institution or a tax exempt investment
  institution

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Consultation Paper participation exemption

• Asset test - categories of passive investments
  continued
• (ii) Intra-group loans except
• - Assets the income of which is subject to tax
  according to the new subject- to-tax test,
  i.e. effective rate of 5 (plus anti-balance
  sheet stretching clause)
• - Intra-group loans held by active group
  financing company
• - Intra-group loans of which 90 funded using
  loans from third parties
• (iii) Operating assets of which (rights of) use
  is granted to affiliated entities, except
• - Assets, the income of which is subject to tax
  according to the new subject-to-tax text
• - Assets held by entity with active
  grant-of-use activities
• - Assets of which at least 90 is funded using
  loans from third parties
• Hybrid loans loans effectively functioning as
  equity no longer eligible for the participation
  exemption if included in the interest box

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Consultation Paper participation exemption

• Subject-to-tax test
• Direct subsidiary is liable to pay profit tax
  with a regular rate of at least 10, which tax
  results in a realistic levy by Dutch standards
• Regular rate of at least 10 refers to normal
  statutory rate. Small in- or decreases of the
  rate not necessarily imply insufficient rate
• Realistic levy specific Dutch tax rules appear
  less relevant to determine degree of taxation
  liability
• Finance companies compare to 5 rate of the
  Dutch interest box
• Different depreciation system acceptable
• No real taxation if e.g. tax holiday, cost-plus
  approach to minor taxable basis, deductible
  dividends, refund of CIT upon distribution,
  overly generous participation exemption

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Consultation Paper group interest box

• Second item Introduction of 5 tax rate for
  group finance activities interest box
• Previously proposed interest box
• Proposed to be effective 2007
• Available for all tax payers upon request
• Ceiling equity times certain rate
• Forex results excluded from the box
• Entity into force postponed pending EU State Aid
  procedure
• European Commission reluctant to approve the
  optional box. Dutch authorities agreed to amend
  to mandatory interest box and expand definition
  of group.
• On July 8, 2009, European Commission approved
  mandatory interest box.

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Consultation Paper group interest box

• Group interest is taxed/deductible at effectively
  5
• Mandatory, per tax payer (or fiscal unity)
• Group interest box items are also
• - Indirect group loans (back to back)
• - Changes in value
• - Hedging instruments
• - Financing part of lease or rental installments
• - Funds/short term investments reserved for
  acquisition purposes (war chest)

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Consultation Paper group interest box

• Group companies
• - Control (in stead of 1/3 interest stake)
• - Approach IAS 27
• - Power to determine financial operational
  policy
• - Right to income/incurring risks
• - Controlling rights of cooperating group are
  added
• up (IAS 31)
• - Family, joint venture, private equity
  structures
• - Facts circumstances test, not optional

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Consultation Paper group interest box

• Loans include agreements comparable to loan
  agreements financial lease and hire-purchase
  agreements.
• Hybrid loan receivables included (currently
  participation exemption)
• Finance component of intra-group rental income
  with respect to fixed assets also included.
• Disqualifying loans relating to intra group
  transfer of assets (not being qualifying
  participations or group interest box assets),
  unless business reason.

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Consultation Paper group interest box

• If group creditor financed group loan with
  external debt group interest box not applicable
  to group interest expense, i.e. deduction at
  25.5
• - Loans must meet the parallelity requirement.
  
• (Direct) external debt used to fund group
  interest box items group interest box applicable
  to interest expense on external debt, i.e.
  deduction at 5

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Consultation Paper group interest box

• Some observations
• - Mismatch for companies that borrow from
  group and onlend to/invest with third
  parties income taxed at 25.5, expense
  deducted at 5
• - Indirect external debt deductible at 25.5
  subject to the strict requirement of
  parallelity difficult to meet. - Overlap
  other restrictions on deduction of interest

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Consultation Paper interest

• Third item Tightening of interest deduction
  limitations
• Currently no restrictions for third-party
  interest, only for related party interest
• Anti-base erosion rules
• Apply to interest connected with listed tainted
  transactions, such as conversions of equity,
  contributions to subsidiaries or acquisitions of
  subsidiaries.
• Unless taxpayer has business motive for both the
  transaction and the funding structure.
• If creditor is taxed at 10, burden of proof for
  tax authorities.
• Thin-capitalization rules
• - Allowed debt-to-equity ratios of 75 to 25,
  or if
• higher, ratio of consolidated group.

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Consultation Paper

• Why changing the interest deduction rules?
• Highly leveraged acquisitions by buy-out firms
• Deduction of interest under both bank debt and
  shareholder debt.
• Thin-cap restriction does not apply if fund is
  not part of consolidated group.
• Base erosion restriction may not apply in case of
  genuine acquisition (business motive).
• Existing mismatch
• Interest under acquisition debt deductible, but
• Connected income from foreign subsidiary exempt.

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Consultation Paper interest deductions

• Option 1 two measures
• (i) Interest relating to participations
• - Finance expense re participations and
  group interest box
• items is not deductible insofar gt
  250,000
• - Disallowed amount average tainted debt
• average total debt
• - Tainted debt is average book value of
• a. participations 20.5/25.5 of group
  interest box assets minus
• b. fiscal equity losses 20.5/25.5 of
  group interest box assets
• So equity first allocated to
  participations and box assets

x total financing expense
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Consultation Paper interest deductions

• (ii) Interest related to acquisitions and fiscal
  unity
• - Finance expenses re the acquisition of a
  subsidiary that is subsequently
  included in the fiscal unity only deductable to
  amount of acquiring companys own
  profit
• - Exceptions - expenses insofar lt
  250,000 - fiscal d/e ratio lt 31
• - Carry forward of excess interest 9 years

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Consultation Paper interest deductions

• Option 2 Earnings Stripping
• Interest not deductible if gt 30 of EBITDA and
• gt 250,000. Balance of all interest income and
  expense, whereby box interest included for 5/25.5
  and carry forward interest included
• Carry forward of excess interest 9 years
• Exceptions
• - Taxpayer not part of group
• - Commercial d/e ratio of tax payer is not
• less favourable than that of group

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Budget 2010

• Changes in participation exemption as of 2010
• Nothing included on interest box and
  deductibility of interest
• Election for loss carry back for 3 years (instead
  of 1) consequence carry forward restricted to 6
  years (instead of 9)
• Royalty/innovation box effective tax rate to 5
  and no longer a cap
• Amendment dividend withholding tax
  (Norway/Iceland)