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Dutch Thin-Cap Abolished from 1 Jan 2013
As the scope of this new regime will differ from the thin-cap, many Dutch companies may have the possibility to deduct more interest, if structured properly. It is essential that businesses carefully review their current financing structure to ensure that it remains as tax-efficient as possible.
Dutch thin-cap generally impacts excess debt-financing and restricts the deductibility of interest on related-party debt, if a specific debt-to-equity ratio is exceeded. Contrary to the thin-cap, under the new rules on excessively debt-financed participations, an excessive debt-to-equity ratio on a Dutch corporate taxpayer does not have to be fatal. Taxand Netherlands investigates the abolition of Dutch thin cap legislation and the impact the new participation interest regime will have on multinationals.
The old regime (thin-cap)
Thin-cap constitutes a general anti-avoidance rule (GAAR) which may adversely impact Dutch corporate taxpayers with excessive debt.
Excessive debt is the part of the annual average fiscal debt which exceeds three times the annual average fiscal equity of the company, to the extent that this excessive debt exceeds EUR 500,000 ("current ratio test"). Loan payables are taken into account where these exceed the outstanding loan receivables. In case a company cannot satisfy the current ratio test an exception is available. By demonstrating that the commercial debt-to equity ratio is lower than that of the group, the interest may nevertheless be deductible, based on the commercial debt-to-equity ratio of the group ("concern ratio test").
The maximum amount of interest which would not be deductible is limited to the amount of interest paid to related companies less the amount of interest received from related companies.
The new regime (participation interest)
Based on the new rule, a taxpayer may not deduct excessive participation interest expenses relating to loans taken out from both affiliated as well as third-party creditors. The deduction may apply irrespective of whether the Dutch taxpayer uses the loan to finance either a Dutch or a foreign participation.
Insofar as the average acquisition price of a (qualifying) participation exceeds the average fiscal equity of the Dutch company, the participation is deemed to be excessively leveraged. Interest expenses and related costs incurred on this excess financing are in principle not deductible.
An exception is made for companies who are expanding their business activities. Generally the interest expenses relating to such an expansion remains deductible. However, this exception is not applicable in case of aggressive tax structuring such as double-dip structures or hybrid financing. The threshold for interest expenses and related costs incurred on excess financing amounts to EUR 750,000 per year.
Companies that may benefit from the new rule are leveraged Dutch companies with only Dutch subsidiaries that may be included in a fiscal unity with the Dutch parent company. The amendment may also be beneficial to leveraged Dutch operating companies with no foreign subsidiaries. Furthermore, the change of these interest deduction rules is positive for Dutch real estate companies. Lastly, the new regime provides for a rebuttal rule that may be invoked by taxpayers falling under the interest deduction, while expanding their business activities.
The abolition of thin-cap and introduction of participation interest will create both risks and opportunities for multinationals. To ensure your Dutch financing structure remains tax-efficient we recommend immediately reviewing your structures and the new Dutch tax laws that now apply from 1 January 2013. Companies risk jeopardising their tax position, if they do not take appropriate tax structuring actions.
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