The Dutch Tax Plan 2013 and accompanying legislation contain a myriad of minor changes and amendments to Dutch tax legislation, but also two major changes to the Dutch Corporate Income Tax Act 1969. Both of these changes relate to the deductibility of interest payments, and are particularly relevant in the context of cross-border transactions and reorganizations. The changes entered into force on January 1, 2013, and will be discussed in further detail below.
Out with the old: termination of thin capitalization regime
The Dutch general thin cap regime has been terminated. Prior to 2013, the Dutch Corporate Income Tax Act 1969 contained a provision that restricted the permissible debt-to-equity ratio (generally, the acceptable ratio was 3:1 for domestic corporate taxpayers). Interest payable on debt in excess of this ratio was generally not deductible for corporate tax purposes. However, the provision was found to adversely impact taxpayers that were not otherwise engaged in any tax structuring (mostly small and mid-cap companies), and has now been terminated altogether.
And in with the new: introduction of new statutory limitation on interest deduction
While the thin capitalization regime has been terminated, a new interest deduction limitation has been enacted. This new rule infringes on the general principle that in the Netherlands, interest expenses may be utilized to offset taxable profits. The new limitation is intended to further combat "abusive" debt financing.
The provision states that interest on "excessive" debt financing is not deductible to the extent that the interest exceeds an annual EUR 750,000 threshold. A Dutch company is considered to have excessive debt if the combined acquisition price of its qualifying participations exceeds the company's total fiscal equity value. The amount of non-deductible interest in a year is basically calculated by dividing the average excessive debt level in year t by the average total debt level in year t, and multiplying the outcome with the total amount of interest paid in year t.
A potentially significant exception applies to interest expenses on a debt-financed expansion of operational activities of the group. Provided that the interest is not already deducted elsewhere within the group and that the financing is not predominantly tax driven, the deductibility of interest expenses relating to a company's expansion of business activities should not be limited by this new rule.