Thursday, 13 October 2016

Netherlands: Changes proposed to related party and acquisition financing rules

On Budget Day, 20 September 2016, the Dutch government released proposed legislative changes to the existing rules limiting the deduction of interest expense. The proposals generally would expand the scope of the related party financing rules and close certain loopholes in the acquisition financing rules. Changes also were announced with respect to the Dutch dividend withholding tax obligations of cooperatives.
The draft bill will be debated in the coming months and, if approved, the rules would apply for book years starting on or after 1 January 2017.

Related party financing rules
Under Dutch tax law, interest expense on debt, including costs and currency exchange results, which are payable to a related party are, in principle, not deductible for Dutch corporate income tax purposes if the financing is used for “tainted” transactions (e.g. the acquisition of shares, profit distributions, repayments of capital and capital contributions). Parties are considered related if a direct or indirect shareholder holds an interest of at least one-third in the Dutch taxpayer; if the Dutch taxpayer holds an interest of at least one-third in its subsidiary; or if the Dutch taxpayer and its “sister company” both are directly or indirectly at least one-third held by another entity or individual.
Based on the wording of the current law, whether parties are related is determined by considering each entity separately, even if a group of entities acts in concert. Under these rules, four or more separate entities that each hold a direct or indirect interest of less than one-third in a Dutch taxpayer would not qualify as a related party for purposes of the related party financing rules. (This situation often occurs in private equity structures, where the fund consists of several limited partnerships.)
The draft bill proposes to amend the definition of “related party,” so that entities that directly or indirectly own less than one-third each in the Dutch taxpayer but that jointly act as a “coordinating group” of companies would be considered a related party for book years starting on or after 1 January 2017. The bill explicitly states that this definition would apply to existing structures (i.e. there would be no grandfathering of existing structures), but the explanatory notes accompanying the bill seem to imply that the proposed amendments would not have retroactive effect.
According to the explanatory notes, the following factors would be considered indicative of the existence of a coordinating group:

  • Control is exercised by a coordinating entity (e.g. general partner/management entity);
  • Each investor provides funding in approximately the same pro rata debt-to-equity ratio to the Dutch taxpayer; and
  • The investors individually cannot decide to rescind their investments.

The proposals confirm that, even where an investing entity qualifies as a related entity, these Dutch interest deduction disallowance rules would not apply if the taxpayer can provide evidence demonstrating valid business reasons for the tainted transaction and financing.

Source & more info: Deloitte