Dutch Decree non-deductibility of certain interest expenses

Thursday 4 April 2013

In the Official State Gazette of 3 April 2013, a Decree of 25 March 2013 on the non-deductibility of certain interest expenses was published (the Decree). The Decree is an update of the previously applicable Decree and incorporates new legislation and case law and enters into force with retroactive effect from 25 March 2013.

Article 10a of the Corporate Income Tax Law (Wet op de vennootschapsbelasting) (CITL) prohibits the deduction of interest expenses related to:

– profit distributions or repayment of capital to a related company or related individual;
– a capital contribution to a related company; or
– the acquisition or an expansion of a participation in a company which becomes a related company after this acquisition or expansion.

Amongst others the Decree states that:

– interest on debts resulting from a capital contribution by (for example) company A to company B at the time of the latter's establishment, whereby A remains indebted for the amount of the contribution, is not deductible;

– interest on debts resulting from capital contributions whereby (for example) company A makes a capital contribution to company B, but remains indebted for the amount of the contribution, and company B in turn makes a capital contribution to company C, but also remains indebted for the amount of that contribution, is not deductible The interest will, however, be deductible if the company can prove (i) the contributions were made for sound business reasons, or (ii) the interest is subject to sufficient (compensatory) taxation in the hands of the recipient (i.e. 10% or more);

– if a participation in a company is built up over time (i.e. "in installments"), and the result of these purchases is that the acquiring company and the company in which the participation is held become related persons, the interest on the debts becomes non-deductible from the moment the two entities are related. The Decree provides that the interest expenses related to the acquisition-related debts incurred before the moment two entities are related are also non-deductible;

– in situations where the shares in a related company are sold, the debts related to capital contributions to, or acquisition or expansion of, that (now sold) related company may never be repaid. In these situations, the interest on these debts is not deductible. The Decree, however, provides for the possibility to deduct the related interest if the proceeds of the sale of the shares are subject to a reasonable level of taxation (i.e. 10% or more);

– In situations in which the interest expenses are not deductible and the taxpayer successfully invokes article 10a(3), wherein a burden-of-proof provision is contained, the deductibility of the interest expenses listed in subparagraph (1)) should remain fully intact.

– the "sound business" criteria is not met if there is an "unsound" diversion of the debt. Externally financed debt is, in principle, deductible. If, however, the debt was re-routed (for example via a non-related company established in a tax haven) for fiscal reasons, the interest on this debt is non-deductible;

– "related" (as in related entity) entails an interest of at least one third. This percentage primarily relates to the participation in the paid-up capital (financial interest), but may also relate to the issued share capital (voting interest). Other forms of interest (special voting shares, hybrid-loans etc.) may also represent forms of influence that contribute to the one-third threshold. 
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