Proposal limitation of interest deduction

Friday 22 April 2011

In the fiscal agenda of the State Secretary of the Department of Finance a limitation was proposed of the possibility to deduct interest payable on loans for the acquisition of Dutch entities by special purpose companies as often used by private-equity funds.

Dutch legislation currently provides the possibility that insofar a takeover is financed through loans, the interest payable on such loans may be available to reduce to the fiscal burden of the new group. Frequently an acquisition is conducted by an acquisition holding company (SPV). The SPV subsequently establishes a consolidated group for tax purposes (fiscal unity) with the target company, which makes it possible to use the interest payable by the SPV as a deduction against the overall tax position of the target company.

The Dutch Government now proposes to introduce a restiction on interest deduction for the SPV. It would be aimed to limit the excessive interest deductions and at the same time to safeguard the desired financial ratios. The restriction could ensure that the interest payable by the SPV associated with the takeover are no longer deductable for the profit of the target company or the consolidated group, but only for the profit of the SPV itself. This would apply to both the intra group interest and any third party interest payable.

To limit the administrative burden and stimulate smaller takeovers, a minimum threshold of €500.000 is contemplated. Furthermore the restriction would only be apply to the extent that the ratio between net assets and debt capital is deemed excessive.

At this point the restriction is a mere policy objective of the Dutch Government and the specific legislation is not prepared. During the course of 2011 more clarity on the exact scope and implementation of the proposal should be provided. 
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