Yesterday, following a leak in the Dutch press of the Dutch Annual Budget papers, the draft 2012 Tax Bill was released. The following elements of the Tax Bill are particularly relevant for the private equity industry.
- In cases where a Dutch holding company acquires at least 95% of the shares of a Dutch target company and forms with it a fiscal unity for corporate income tax purposes (allowing them to file a consolidated tax return), the deductibility of interest on acquisition debt, including debt owed to third parties, will be restricted if and to the extent such interest exceeds EUR 1 million and the debt-to-equity ratio of the fiscal unity group exceeds 2:1.
- Dutch cooperatives will be subject to Dutch dividend withholding tax in certain cases considered to be abusive.
- The liability for Dutch corporate income tax of non-resident companies that own a "substantial interest" in Dutch corporate entities that is not attributable to an enterprise carried out by such shareholder will be restricted to cases considered to be abusive.
- It is proposed that these measures will enter into force on 1 January 2012, with the understanding that the restriction of the deductibility of interest does not apply to acquisitions of Dutch target companies that became part of a fiscal unity for Dutch corporate income tax purposes prior to 2012.
At a later stage, a more extensive client memorandum on this subject will be circulated.
Restriction of deductibility of interest on acquisition debt within a fiscal unity
Fiscal unity: general
For Dutch corporate income tax purposes, a Dutch parent company can upon request consolidate a Dutch subsidiary in which it holds an equity interest of at least 95% (fiscal unity). As a result of such fiscal unity, provided the existing anti base erosion and thin cap restrictions do not apply, interest paid or accrued on debt attracted by the Dutch acquisition company to finance the acquisition of the target company can be deducted from the taxable profits of such target companies and other subsidiaries included in the fiscal unity.
The Tax Bill restricts the deductibility within a fiscal unity of interest paid or accrued on intra-group and third party debt attracted for the acquisition of one or more Dutch target companies that subsequently became part of the same fiscal unity. Such interest is not deductible from the profits of the fiscal unity attributable to such target companies except:
- if and to the extent the interest does not exceed EUR 1 million; or
- if and to the extent the debt-to-equity ratio of the fiscal unity does not exceed 2:1.
For the purpose of the calculation referred to under (ii) above, the amount of equity will be reduced by the tax book value of participations qualifying for the participation exemption.
The Tax Bill provides for specific rules dealing with what is referred to as the "goodwill gap". The goodwill gap is the difference between the acquisition price of the shares in the target company and the net tax book value of the assets and liabilities of the target company, which difference will not be reflected in the consolidated tax balance sheet of the fiscal unity. For the purpose of the calculation referred to under (ii) above, the goodwill amount can be added to the fiscal unity's equity, provided that the goodwill amount is reduced by 10% annually.
Overlap with existing rules
These new rules on interest deduction within fiscal unities are supplementary to existing anti base erosion rules and thin cap restrictions.
We note that the proposal does not restrict the deduction of interest due on third-party debt financing relating to acquisitions of companies that do not form a fiscal unity with the Dutch acquisition company, referred to as Bosal interest. However, the Annual Budget takes into account increased revenues of EUR 59 million as a result of the introduction of a legislative proposal on this subject. At this point, it is uncertain when this proposal will be submitted.
Dutch cooperatives subject to Dutch dividend withholding tax in abusive situations
The draft bill introduces Dutch dividend withholding tax for distributions by Dutch cooperatives in case of abusive situations, particularly where a cooperative is interposed to avoid Dutch or foreign taxes.
Distributions by a Dutch cooperative to its members will be subject to Dutch dividend withholding tax if:
(a) the Dutch cooperative holds an equity interest in one or more Dutch or foreign companies;
(b) the main purpose or one of the main purposes of the holding of these interests is to avoid Dutch or foreign taxes; and
(c) these distributions are paid in respect of membership interests that are not attributable to an enterprise of the relevant member.
Presently, members are only subject to Dutch (corporate) income tax if they hold a substantial interest (5% or more) that is not attributable to an enterprise carried on by such member. Therefore, this proposal is particularly relevant for foreign members that do not hold a substantial interest (<5%).
As an exception to the rules described above, distributions by a Dutch cooperative to members will be subject to Dutch dividend withholding tax even if the membership interests are attributable to an enterprise:
(w) if conditions (a) and (b) are satisfied;
(x) if the Dutch cooperative has acquired equity interests in another Dutch company;
(y) if that Dutch company at the time of the acquisition had retained earnings, unrealized profits or profit potential, e.g. in the form of goodwill (together referred to as "pure profit" (zuivere winst)); and
(z) up to an amount equal to such Dutch company's "pure profit".
Non-resident Dutch corporate income tax liability
Pursuant to the existing domestic rules, a foreign company is subject to Dutch corporate income tax, among others, if it holds a substantial interest (5% or more) in a Dutch company that is not attributable to an enterprise of that foreign company.
The Tax Bill restricts this liability to corporate income tax. A foreign company holding a substantial interest that is not attributable to an enterprise will only become subject to Dutch corporate income tax if the main purpose or one of the main purposes of it holding the substantial interest is the avoidance of Dutch corporate income tax or dividend withholding tax.