Dutch |
Print7 May 2008
As of 1 January 2004, thin capitalization rules were introduced in The Netherlands. These rules – providing for restrictions on the deductibility of interest expenses in case of companies that are largely financed with debt - do apply to all companies regardless their activities.
The essence of these thin capitalisation rules is that interest deduction on loans granted by group companies is not allowed to the extent the percentage of loan funding exceeds a certain ratio. This ratio is 75:25 i.e. the loan funding may not exceed three times the equity funding, or in other words, the loan funding may not exceed 75% of total funding. By applying this ratio both intra-group loans and bank loans must be considered, but in essence only the net amount of loans (debt less receivables) counts for the 75% threshold. To the extent the loan funding exceeds the 75% threshold, the tax deduction of interest paid on group loans will be denied, unless one of the following escapes apply:
Though the debt-equity for a Dutch company is fixed, the escape route to apply the debt-equity ratio of the (international) group of which the Dutch company is part of creates more flexibility. In this scenario the group’s debt-equity ratio will be established on the basis of the respective consolidated statutory accounts and as far as possible same accounting principles. In essence, the Dutch company needs to prove that its debt-equity ratio is in line with the group ratio (i.e. the lower the group ratio the better). The Dutch corporate income tax act however does not set out how this group ratio is to be compiled.
A Dutch lower Court (Rechtbank Arnhem) recently decided how the concern ratio needs to be compiled for application of the thin capitalization rules. The question was whether the share of a third-party shareholder had to be included in the equity of the group for consolidation purposes, which was the opinion of the tax inspector. In view of the Dutch tax payer the third party share had to be excluded as a result whereof the group’s equity would be lower and thus the group ratio higher. The lower court ruled that as the text of the regulation is not clear on this while the Parliamentary history on some points is in conflict with the text of the regulation, it is not up to the court to decide disadvantageously to the tax payer. The third party equity can thus be excluded for determining the group debt-equity ratio.
The debt-equity ratio described in the Dutch Corporate income tax act is fixed unless the Dutch company applies the group-ratio escape. The group-ratio is established on the basis of the consolidated statutory accounts and as far as possible the same accounting principles. As the text of the regulation is not specifically clear as to how the groups equity is to be determined it gives the Dutch company more flexibility with respect to the accounting principles it applies. Actually the lower court refers to the legislator to amend the text of the regulation to create more clarity.
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