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Parliament Amends Interest Deduction Legislation

25 Jun 2012

On 5 June, new legislation limiting the interest deduction on excessively leveraged participations, was proposed. On 21 June 2012 the Lower House of Dutch Parliament passed the bill but made some important changes. Taxand Netherlands examines these changes and looks at the wider impact on organisations with Dutch activity.

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 taxpayer uses the loan to finance a Dutch or a foreign participation.

Where the average acquisition price of the (qualifying) participations exceeds the average fiscal equity of the company, the participations are 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 structures such as double-dip structures or hybrid financing.

Taxand Netherlands explores in detail the amendments from the Dutch authorities made to the bill

Taxand's Take

The new rule is in principle an efficient mechanism, and still allows for interest deductions related to (foreign) subsidiaries provided that business activities are being financed. Although the main rule is quite simple, the definition of the exception related to business activities is unclear, complicating the process to obtain an interest deduction in the Netherlands. The expectation is, however, that the interest deduction rules will be simplified in the future.

The new rule, if approved, will become effective on 1 January 2013. Apart from the exception for acquisitions and capital contributions pre- 2006, there is no further grandfathering. Companies should now check whether the new rule has an impact on their tax structure -actions could be taken to reduce or avoid the adverse consequences of the new rules, for example through equity contributions, refinancing etc. For advice on potential solutions, please contact Taxand Netherlands.

Your Taxand contacts for further queries are:
Marc Sanders
T. +31 20 301 80 38

Jimmie van der Zwaan
T. 31 20 301 66 32

Taxand's Take Author