On 15 June 2009, the Dutch government issued a discussion paper on its plans to submit a bill amending the Dutch Corporate Income Tax Act. The amendments discussed in the paper are the introduction of (i) a mandatory group interest box (with lower rates), (ii) certain new interest deduction limitation rules and (iii) improvements to the Dutch participation exemption regime.
1. Mandatory group interest box
Under the proposed group interest box rules, the balance of group interest received and paid would be subject to Dutch corporate income tax at an effective rate of 5%. Other types of income that would be included in the box are (i) currency exchange results on group loans, (ii) profits and losses on instruments used to hedge interest and currency risks on group loans and (iii) income on short-term portfolio investments that are kept for future acquisitions. The group interest box would be mandatory and there would be no cap on the amount of income it can include.
The introduction of the group interest box rules is subject to confirmation by the European Commission that the proposed system does not constitute state aid. The system should make the Netherlands more attractive as a location for group finance activities. On the other hand, for Dutch taxpayers it would effectively limit the deductibility of group interest.
2. Interest deduction limitation rules
The paper puts forward the following two alternatives for limiting the deductibility of interest:
- the introduction of specific rules limiting the deductibility of interest paid on loans which, based on a certain formula, are attributable to qualifying participations and group receivables (generating exempt or low-taxed income). The rules would also reduce the ability to offset the interest costs of an acquisition holding company against the profits of subsidiaries that form part of the same consolidated tax group.
- the introduction of earning-stripping rules. Under these rules the deduction of (net) interest would be limited to 30% of the taxpayer's EBITDA (earnings before interest, taxes, depreciation and amortisation).
Under both alternatives, the rules would apply irrespective of whether the interest was paid to related or unrelated parties and would replace the present thin capitalization rules. The main purpose of the rules is to limit the deduction of interest paid in relation to exempt (or low-tax) income or on excessive debt incurred to fund leveraged takeovers.
3. Improvements to participation exemption regime
Under the present rules, the participation exemption generally applies to a shareholding of 5% or more provided that the subsidiary is not a low-taxed portfolio company. There are factual tests for determining whether a subsidiary is such a company. The discussion paper puts forward several proposals for the simplification and relaxation of the conditions for the exemption. Under the proposed rules, the participation exemption would in any event apply if the shareholding is not held as a portfolio investment.
Interested parties now have the opportunity to respond to and comment on the discussion paper. The government intends to present a draft bill after the summer.