Interest deductions in the Netherlands

Transcription

1 Interest deductions in the Netherlands May INTRODUCTION 1.1 In general, interest payments made by a Dutch corporate taxpayer (the "Dutch taxpayer") are deductible from its taxable income. Notwithstanding this general rule, interest deduction is subject to a number of statutory and non-statutory restrictions. This memorandum sets out these restrictions on interest deduction. In doing so, the following structure will be adhered to: It should be determined first whether a loan for civil law purposes qualifies as a loan for tax purposes; Once a loan exists for tax purposes, the deduction of interest is subject to the statutory interest deduction restrictions laid down in the Dutch Corporate Income Tax Act 1969 ("CITA"). These statutory restrictions are: (i) Hybrid loans (article 10, paragraph 1, letter d, CITA) (paragraph 2); (ii) Anti-base erosion rules (article 10a CITA) (paragraph 3.2); (iii) Long-term, low-yield related party debt (article 10b CITA) (paragraph 3.3); (iv) Excessive participation debt (article 13l CITA) (paragraph 3.4); and (v) Acquisition debt rules (article 15ad CITA) (paragraph 3.5). 1.2 If the interest is not subject to any of these statutory interest deduction restrictions, it needs to be determined whether any deduction is restricted on the basis of the non-statutory restrictions found in case law. These non-statutory restrictions are: (i) The abuse-of-law doctrine (fraus legis) (paragraph 4.1); and (ii) The non-business-like loan doctrine (paragraph 4.2). 1.3 This memorandum does not address transfer pricing adjustments and assumes that the Dutch taxpayer is acting for its own account and not as an agent. 1.4 This memorandum also addresses the proposed implementation of article 4 of the Anti-Tax Avoidance Directive ("ATAD I") concerning earnings stripping in Our ref. K99698/3/13 1 / 12

2 article 15b CITA (paragraph 3.6). Although the proposed article 15b CITA is discussed in this memorandum, the adopted measure might deviate from it. In addition, based on the explanatory notes accompanying the proposed article 15b CITA, the other statutory interest deduction restrictions are subject to review. 1 As such, these provisions might be amended or abolished in the near future. These amendments, if any, are expected to be in force as of 1 January Contents of this memorandum 1 INTRODUCTION DEBT OR EQUITY STATUTORY RESTRICTIONS ON INTEREST DEDUCTION Case law restrictions on interest deduction DEBT OR EQUITY 2.1 In principle, the characterisation of a loan for tax purposes follows the characterisation of a loan for civil law purposes. The Dutch Supreme Court has, however, formulated three exceptions to this general rule. 2 In addition, regarding equity, the Dutch Supreme Court has held that if the instrument qualifies as equity for civil law purposes, this characterisation must be followed for tax purposes. To date, there is no evidence of exceptions to the rule on the characterisation of equity for tax purposes A loan is re-characterised as equity for tax purposes if it qualifies as: a sham loan (schijnlening): a loan is treated as a sham loan if the parties have only created the appearance of a loan on paper while, in fact, they intend to provide an equity contribution; a loss financing loan (bodemloze-put lening): a loan is treated as a loss financing loan if it is granted under such conditions (for example, to a subsidiary that sustains substantial losses), that the parties should have realised from the outset that the loan would not be repaid, either wholly or partially, due to the substantial losses; or a participating loan (deelnemerschapslening): 4 a loan is treated as a participating loan if it meets the following three conditions: 5 1 Consultation Document ATAD, published on 10 July 2017, p Dutch Supreme Court 27 January 1988, no , BNB 1988/ Dutch Supreme Court 7 February 2014, no. 12/04640, BNB 2014/80. 4 The non-deductibility of interest payments made in relation to a participating loan have also been codified in CITA (article 10, paragraph 1, letter d, CITA). 5 Dutch Supreme Court 11 March 1998, no , BNB 1998/208 and Dutch Supreme Court 25 November 2005, no , BNB 2006/82. Our ref. K99698/3/13 2 / 12

3 (i) (ii) (iii) profit contingent interest - the interest remuneration almost entirely depends on the profits realised by the borrower; 6 and subordinated - the loan is subordinated to claims of all ordinary creditors; and perpetual - the term of the loan is for an indefinite period (that is, a term of more than 50 years), 7 while repayment of the loan can only be demanded in the event of bankruptcy or liquidation If a loan were re-characterised as equity for tax purposes, the interest payments would be treated as profit distribution payments and would not be deductible. 9 In addition, these payments would be subject to 15% Dutch dividend-withholding tax. 3 STATUTORY RESTRICTIONS ON INTEREST DEDUCTION 3.1 General Once it has been established that a loan qualifies as a loan for Dutch tax purposes, the interest paid is, in principle, deductible unless one of the statutory restrictions on interest deduction applies. These statutory restrictions are discussed in this section in the following order: Hybrid loans (art. 10, paragraph 1, letter d, CITA; see paragraph 2); (d) (e) Anti-base erosion rules (art. 10a CITA); Long-term, low yield related party debt (art. 10b CITA); Excessive participation debt (art. 13l CITA); and Acquisition debt rules (art. 15ad CITA). 3.2 Anti-base erosion rules (article 10a CITA) Article 10a CITA restricts the deduction of interest, including related costs and currency results, paid or accrued by the Dutch taxpayer on a directly or indirectly - legally or in fact - related-party loan that is used directly or indirectly - legally or in fact - in connection with a tainted transaction. In addition, if the interest were 6 The remuneration is deemed to be dependent on the profits realised by the borrower if the liability to pay interest is dependent upon whether the borrower realises profits. As such, fixed interest remuneration, which is only due if the borrower realises profits, qualifies as a profit contingent interest. 7 Dutch Supreme Court 25 November 2005, no , BNB 2006/82. 8 Dutch Supreme Court 11 March 1998, no , BNB 1998/ See article 10, paragraph 1, letter a, CITA for the sham loan and loss financing loan and article 10, paragraph 1, letter d, CITA for the participating loan. Our ref. K99698/3/13 3 / 12

4 not deductible, the taxpayer could attempt to make use of the rebuttal scheme. If such an attempt were to succeed, the interest would be deductible In this section, the following elements of the anti-base erosion rules are discussed: tainted transactions; related party-loans; the rebuttal scheme Related party definition One of the key definitions for the purposes of article 10a CITA is the term "related party". A party is considered related if: (d) the Dutch taxpayer owns at least a one third interest in the other company; or that company owns at least a one third interest in the Dutch taxpayer; or a third company owns at least a one third interest in both the Dutch taxpayer and that company; or that company is part of a fiscal unity together with the Dutch taxpayer Tainted transactions According to article 10a CITA, three transactions can be distinguished that qualify as a tainted transaction: a profit distribution or repayment of capital to a related company or related individual; a capital contribution in a related company; or the acquisition of a company or an extension of an interest of shares in a company, which is or becomes a related company after the acquisition or extension Related-party loans If a tainted transaction is financed directly or indirectly - legally or in fact - by a related-party loan, the interest, including related costs and currency results, is Our ref. K99698/3/13 4 / 12

5 not deductible. A loan is considered a related-party loan if it is issued directly or indirectly - legally or in fact - by a related party In addition, as of 1 January 2017, a loan is considered a related-party loan if it is made by a company that is part of a collaborating group (samenwerkende groep). A collaborative group exists if the companies forming a collaborating group jointly own: at least a one-third interest in the Dutch taxpayer; or at least a one-third interest in the Dutch taxpayer and a one-third interest in another company Whether a group of companies qualifies as a "collaborating group" depends on all facts and circumstances. Factors to be taken into account are the agreements concerning the investment and financing, as well as the actual conduct of members of the collaborating group. 10 The explanatory memorandum clarifies that the mere fact that companies have made a joint investment is not sufficient for forming a collaborating group; the investors must actually collaborate in relation to the investments made. 11 An example of when a "collaborating group" is deemed to exist is when: 12 the effective control of the investment and the joint interest in the Dutch taxpayer is effectively vested in one coordinating (legal) person; and all shareholders provide equity and loans under similar conditions and in a similar ratio Rebuttal scheme If it is established that a tainted transaction has been financed by a related-party loan, the interest is not deductible. However, the interest paid or accrued on the related-party loan by the taxpayer in connection with a tainted transaction is nevertheless deductible if one of the following exceptions applies: the Dutch taxpayer demonstrates that it had predominantly sound business reasons both for entering into the tainted transaction and for funding the transactions with a party-related loan; 13 or 10 Parliamentary Proceedings II 2016/17, , no. 3, p Parliamentary Proceedings II 2016/17, , no. 14, p Parliamentary Proceedings II 2016/17, , no. 3, p Until 2018, a party-related loan was deemed to be entered into for predominantly sound business reasons if the loan was ultimately externally financed under parallel conditions (such as duration, maturity, repayment schedule, interest rate), while the tainted transaction would also be deemed to be entered into for predominantly sound business reasons. As of 2018, however, the taxpayer has to demonstrate Our ref. K99698/3/13 5 / 12

6 the interest received by the related party is subject to an effective tax of at least 10% calculated according to Dutch tax standards while the recipient has not granted the loan in order to tax set-off the interest received against current or anticipated future losses. However, if the Dutch taxpayer fulfils these conditions, the Dutch tax authorities have the opportunity to reasonably establish that the tainted transaction and/or the party-related debt were not entered into for valid business reasons. 3.3 Long-term, low-yield related party debt (article 10b CITA) Article 10b CITA seeks to limit interest deduction on long-term, low-yield debt received from related parties. Interest paid and changes in the value of the loan are not deductible in relation to loans: granted by a related party within the meaning of article 8b CITA; 14 have no fixed maturity or a term of more than 10 years; 15 and are interest-free or carry an interest rate substantially (i.e. at least 30%) below arm's length interest rate Although article 10b CITA addresses all interest paid on long-term, low-yield related party loans, its purpose is to only address interest paid to non-dutch resident related parties. As such, in the event of a loan issued by a Dutch resident related party, that related party could attempt to invoke the hardship clause. Under the hardship clause the interest paid remains non-deductible, but the interest received would be treated as paid in relation to a participation loan entailing that it is exempt if the participation exemption applies Excessive participation debt (article 13l CITA) Article 13l CITA restricts the deductibility of "excessive" interest that is deemed to relate to the acquisition of subsidiaries of which the benefits fall within the scope of the participation exemption. In determining whether interest paid in relation to debts is non-deductible, article 13l CITA disregards any actual relation between a taxpayer's debts and its investments in exempt participations. Instead, it allocates debt to exempt participations through a strictly mathematical formula predominantly sound business reasons for entering into the tainted transaction even if the party-related loan is ultimately externally financed. 14 Within the context of article 10b CITA, the term "related party" is broader than the definition used in article 10a CITA. The issuer of the loan is deemed to be related if its direct or indirect control, supervision or equity participation leads to such a relation that the issuer can influence the terms of the loan. 15 If the maturity of a loan with an initial term of less than 10 years is extended past the 10 th anniversary of the loan, the loan is deemed to have had a term more than 10 years from inception. Consequently, a loan extension may result in interest that was deducted in prior years to become non-deductible with retroactive effect. 16 Parliamentary Proceedings II 2005/06, , no. 8, p. 84. Our ref. K99698/3/13 6 / 12

7 which can result in counterintuitive and sometimes unfair outcomes, both to the detriment and to the benefit of the taxpayer. In addition, contrary to article 10a and 10b CITA, article 13l CITA does not require the loan to be issued by a related party; instead it applies to all debts entered into by the Dutch taxpayer The non-deductible interest is calculated (simplified) as follows: AAAAAAAAAAAAAA PPPPPPPPPPPPPPPPPPPPPPPPPP DDDDDDDD AAAAAAAAAAAAAAAAAA IIIIIIIIrreeeeee EEEEEE 750,000 AAAAAAAAAAAAAA TTTTTTTTTT DDDDDDDD For this purpose, the Participation Debt is calculated as follows: Participation Debt means the Tainted Participation Investments minus Equity. The Participation Debt cannot exceed the actual amount of debt of the taxpayer. Any debt of which the interest is already fully nondeductible on the basis of article 10a or 10b CITA is disregarded; Tainted Participation Investments means the historic aggregate net investment in the exempt participations. In principle, this includes the historic acquisition cost and additional capital contributions to the exempt participations. However, investments are disregarded (and thus not counted towards the Tainted Participation Investments) to the extent that the investment results in an expansion of the operational activities of the taxpayer's group in the 12 months before or after the investment, either by the relevant participation itself or by any other group company (the "Operational Expansion Exception"). However, the Operational Expansion Exception does not apply if: (i) (ii) (iii) there is a "double dip" structure whereby the interest on a participation debt from a related party (as defined in 3.2.3); there is a "complicated double dip" structure entailing that the interest on the participation debt is directly or indirectly related to a tax deductible payment by a related party (as defined in 3.2.3) while the corresponding payment received is not subject to an effective tax rate of 10% calculated according to Dutch tax standards; and it is reasonable to assume that the investment would not have been made if the interest would not have been deductible. This test entails that there must have been other motives, besides interest deduction, to acquire the operational expansion by a Dutch taxpayer. Our ref. K99698/3/13 7 / 12

8 Optionally, investments made before 1 January 2006 can be disregarded for 90%. Equity means the taxpayer's equity for tax purposes, but not less than nil and subject to certain adjustments By disregarding investments resulting in an expansion of operational activities and allocating all equity to the remaining Tainted Participation Investments first, the scope of article 13l CITA is intended to be limited to truly excessive interest deductions. However, given the strictly mathematical approach and certain complexities not described in the simplified formula above, the outcome of article 13l CITA can be rather unpredictable and vary from year to year Article 13l CITA applies to interest but also to: (i) related costs and expenses, (ii) costs for hedging interest rate risks and currency risks in respect of the interest only, and (iii) currency results on hedging instruments for the hedging of currency risks on the interest only (but not the principal) Complex rules apply to address: (i) the overlap between article 13l CITA and other interest restrictions, and (ii) intra-group reorganisations. 3.5 Excessive acquisition debt (article 15ad CITA) The amount of interest paid that is not deductible on the basis of article 15ad CITA is the lowest amount of: the Excessive Acquisition Interest; and the interest paid on the Excessive Acquisition Debt Interest that is non-deductible based on the Acquisition Debt restrictions can be deducted from the fiscal unity parent's stand-alone profits in future years. This carry-forward is for an indefinite period of time First, it must be determined whether the interest paid in relation to the Acquisition Debt is considered excessive. The interest is considered excessive if it exceeds EUR 1,000,000 plus the fiscal unity's parent's profits on a "stand-alone" basis, that is, disregarding the profits attributable to the target company ("Excessive Acquisition Interest"). These stand-alone profits include profits attributable to other fiscal unity companies for which no Acquisition Debt is outstanding, either because the acquisition was fully equity-financed or any Acquisition Debt has already been fully repaid Second, the Acquisition Debt to acquisition price of the target company ratio must be determined (the "Loan-to-Purchase-Price Ratio"). In the year of the Our ref. K99698/3/13 8 / 12

9 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 7 years, down to 25% in year 8 and later years. To the extent that the Acquisition Debt exceeds the acceptable Loan-to-Purchase-Price Ratio, it qualifies as excessive acquisition debt ("Excessive Acquisition Debt") Article 15ad CITA restricts the deduction of interest for debts attracted directly or indirectly, legally or in fact, in connection with the acquisition of, or increase of an investment in, a Dutch target company while the target company enters into a fiscal unity with the acquisition company or is legally a merger with the acquisition company ("Acquisition Debt") As of 1 January 2017, three amendments were introduced to article 15ad CITA: Circumvention of the interest deduction restriction was addressed by extending the scope of article 15ad CITA to Acquisition Debt that has been "pushed down" to the target company after acquisition; and Renewal of the 60% Loan-to-Purchase-Price Ratio by transferring the target company from one fiscal unity to another fiscal unity within the same group has been countered; and The grandfathering rule providing that debt funding already in place as of 15 November 2011 has been abolished. 3.6 Proposed earnings stripping rules (article 15b CITA) Based on the guidance of the 2017 Dutch Coalition Agreement dated 10 October 2017 (Regeerakkoord 2017 "Vertrouwen in de toekomst") and the International Tax Policy Letter dated 23 February 2018, 18 the Netherlands would implement the earning stripping rules laid down in article 4 of ATAD I as follows: no grandfathering rule for loans entered into prior to 17 June 2017; no (particular) group ratio exception; the safe harbour for deductible interest set at EUR 1,000,000 (instead of the maximum of EUR 3,000,000); and (d) the level of the EBITDA-threshold set at 30%. 17 A fiscal unity is a consolidated tax group for Dutch corporate income tax purposes. A Dutch parent company can, upon request, include a Dutch subsidiary in a fiscal unity if it holds at least 95% of its nominal share capital. As a result, Dutch CIT is levied as if the Dutch parent company and the Dutch subsidiary are a single taxpayer. 18 Letter of 23 February 2018 'Bijlage - Aanpak belastingontwijking en belastingontduiking'. Our ref. K99698/3/13 9 / 12

10 3.6.2 As a consequence, net interest costs, including related costs and currency results, 19 would not be deductible to the extent that they exceed 30 percent of the taxable profit adjusted for interest income, interest expenses and depreciation expenses (EBITDA) and the EUR 1,000,000 threshold. The exact scope of the implementation of the earnings stripping rule might deviate from this, but the earnings stripping rules must be effective as of 1 January CASE LAW RESTRICTIONS ON INTEREST DEDUCTION 4.1 Fraus legis If the interest deduction is not restricted on the basis of the statutory provisions in the CITA, the deduction can nevertheless be denied on the basis of the Dutch abuse-of-law concept of fraus legis. The concept of fraus legis can be applied if: the main purpose of transaction is to avoid taxation, and it would be in conflict with the aim and purpose of the CITA if the interest deduction were allowed Case law where the deduction of interest was denied on the basis of fraus legis led to the introduction of the anti-base erosion rules as described in paragraph 3.2. But even with the existence of specific statutory interest deduction restrictions in the CITA, the concept of fraus legis can still be applied to cases that fall outside the scope of the statutory restrictions. 4.2 Non-business-like loans In 2011, the Supreme Court ruled on the Dutch tax consequences of certain nonbusiness-like loans. The main consequence of qualification of a loan as nonbusiness-like is that the lender cannot claim a tax deduction for the write-off of such loans when the borrower defaults or is likely to default. But the Supreme Court also determined that the lender and borrower of a non-business-like loan must apply interest at a "guaranteed" interest rate to determine their taxable profits. This means the rate the borrower would have had to pay to an independent lender with a guarantee of the parent company. As a result, the borrower of a non-business-like loan can only deduct interest up to this 'guaranteed' interest rate Non-business-like loans are loans made to a related party under such conditions that independent parties would only have been willing to grant the loan with an interest that would, in fact, be profit sharing. To come to this conclusion, it should first be determined whether the interest rate of a related-party loan is at arm's length terms, considering all other conditions such as the security provided and 19 Net interest costs means the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives according to national law. Our ref. K99698/3/13 10 / 12

11 repayment schedule. If the interest is not at arm's length, then the second question is whether the interest can be adjusted to an arm's length rate but not to a rate that makes the loan, in fact, profit sharing. If the interest cannot be adjusted to an arm's length rate, then the lender is considered to have accepted the credit risk because of its relation with the borrower and the entire loan is considered non-business-like. The above is a concise overview and as such should not be considered as detailed advice. Please contact one of our tax law experts should you have any further questions. Our ref. K99698/3/13 11 / 12

12 No. Article Description Scope Safe harbours/escapes Timing 1. 10(1)(d) CITA Hybrid loans. Loans qualify as hybrid if they are: Profit sharing; Subordinated; and Perpetual or a maturity exceeding 50 years. All debt N/A In force 2. 10a CITA Anti-base erosion rules targeting party-related debt in relation to : Profit distributions; Capital contributions; or Acquisitions. Related-party debt only Sound business reasons; or Interest received subject to sufficient taxation In force 3. 10b CITA Long-term, low-yield related-party debt: Maturity exceeding 10 years; and No interest or an interest substantially below arm's length. Related-party debt only N/A In force 4. 13l CITA* Avoidance of base erosion through interest on debt deemed to relate to investments in subsidiaries that qualify for the participation exemption, except to the extent: The investment resulted in an expansion of the group's operational activities; and The structure is not abusive, e.g. no double dip or otherwise primarily tax motivated ad CITA* Avoidance of base erosion through a leveraged acquisition followed by tax grouping, merger or split-off. All debt Interest up to EUR covered by 13l is deductible Equity participations deemed funded by priority with equity All debt Standalone profit plus EUR 1,000,000 In force In force 6. Proposed 15b CITA Implementation of article 4 of the Anti-Tax Avoidance Directive (earnings stripping). Net interest costs are not deductible to the extent that they exceed 30% of the EBITDA for tax purposes. All debt EUR 1,000,000 threshold. Standalone entities are excluded No grandfathering No group ratio exception. Deadline for implementation: 1 January 2019 * These provisions might be amended or abolished as of 1 January 2019 at the latest. Our ref. K99698/3/13 12 / 12