The Dutch government proposes to abolish its thin capitalisation rules from 1 January 2013 and at the same time to introduce a specific anti-abuse provision. This new provision aims, in case of abuse, to limit the deductibility of excessive interest expenses related to debts that are incurred to acquire or expand participations in subsidiaries that qualify for the participation exemption.
Proposal to abolish the general thin capitalisation rules
The Dutch government proposes to abolish its thin capitalisation rules as from 1 January 2013. The Dutch thin capitalisation rules currently provide for a fixed maximum 3:1 debt-to-equity (D/E) ratio, meaning that interest expenses on the excess debt will not be deductible if and to the extent that the total debt exceeds three times the total equity plus EUR500,000. In calculating the debt for the 3:1 D/E ratio, only the net debt should be taken into account (i.e., debt minus receivables). Where the D/E-ratio of the group to which the Dutch taxpayer belongs exceeds the 3:1 D/E ratio, that higher ratio may be applied at the option of the taxpayer.
Whereas all debt is taken into account in establishing the D/E ratio, only interest paid to related parties may be disallowed and only if, and to the extent that, such interest exceeds interest received from related parties. Consequently, interest on third party debt remains in principle fully deductible.
Specific interest deduction limitation rule
As from 1 January 2013, a new interest deduction limitation rule will apply with respect to specific transactions related to the debt financing of participations in subsidiaries that qualify for the participation exemption. There is a general allowance of EUR750,000 per annum. The rule applies to both related as well as third party debts.
The new provision will only apply to the extent that the annual average cost price of the subsidiaries exceeds the annual average equity. This excessive part is deemed to be financed out of debt ("Participation Debt"). The interest on the Participation Debt will, however, remain deductible if the acquisition of, or the capital contributions to, a subsidiary relate to an expansion of the operational activities of the group to which the taxpayer belongs, unless the interest is also deductible elsewhere in the group (double dip) or if the subsidiary is only acquired by the Dutch company in order to achieve an interest deduction in the Netherlands.
If a Dutch company is engaged in active financing activities, debt incurred from related parties in order to provide loans to related parties will not be considered Participation Debt.