16 October 2012 Add expertise tag Add service tag Add country tag

On 18 September 2012 a law proposal has been submitted to the House of Representatives (i.e. in Dutch: “Tweede Kamer”). In this law proposal, a proposal is included to abolish the Dutch thin capitalization rules (the maximum 3:1 debt/equity ratio) as of 1 January 2013.

This proposed legislation should have to be approved by the House of Representatives as well as the Senate (i.e. in Dutch: “Eerste Kamer”). At this moment, no grandfather rule has been included. This implies that any new rules may be applicable to all existing Dutch corporations.

Earlier this year, on 12 July 2012, another law proposal has been approved by the Parliament. In this law proposal a proposal is included to which aims to limit the right on tax deduction of interest expenses and other financing expenses for holding companies. This new legislation will enter into force as of 1 January 2013, but this legislation also has an impact on existing loans.

You will find the following information on this webpage:

The general impact of the new regime for Dutch corporations

The general impact of the new regime (i.e. the proposed abolishment of the thin capitalization rules, but also the new regime) is an improvement of the fiscal investment climate in the Netherlands.

Companies which do not perform holding activities are no longer limited to fund their Dutch operations with (intra group debt) by a fixed debt – equity ratio. Depending on the specific situation, other limitations of interest deduction can still be applicable apply, but this is not likely to occur in the ordinary course of business.

For holding companies, the new rules can create significant limitation for the tax deduction of interest expenses and other financing expenses, but only to the extent these expenses exceed an amount of € 750,000 (fixed threshold). Furthermore, the new limitations will not apply to the extent loans are used to fund a true expansion within the group. In fact, the new rules can offer significant tax benefits for the structuring of third party acquisition through a Dutch holding company (if no other interest denial rules are applicable).

Dutch holding companies are only likely to be affected by the new limitation if the following cumulative conditions are met:

  1. the accumulated amount of interest expenses and other financing expenses exceeds € 750,000 per annum, and
  2. the average fiscal equity during the year is lower than the average amount of the accumulated acquisition price of subsidiaries, and
  3. he holding company has acquired shares in subsidiaries or made capital investments in subsidiaries which were not linked to a through expansion of the group.

Please feel free to use these parameters as a quick scan to determine whether or not immediate action is required, but we do advice that you consult your Dutch tax advisor to determine the exact tax position of your Dutch corporation.

Of course, we would also be gladly prepared to advice you on this subject.

Legislative status

On 4 June 2012 the State Secretary presented draft legislation to the Parliament in which a wide range of tax measures was proposed. In this draft legislation a new limitation for the tax deduction of interest expenses and other financing expenses with respect to so-called excessive financing of participations (hereinafter: “participation financing expenses”) was included. The State Secretary also indicated that he would like to abolish the thin capitalization rules, as soon as there was any budgetary possibility.

On 21 June 2012 the Lower House adopted the aforementioned draft legislation (including amendments). On 10 July 2012 the Senate adopted the legislation. The new legislation relating to participation financing expenses will have an effect for book years starting as of 1 January 2013.

In the legislative procedure, it is stipulated that special rules for reorganizations and fiscal unity will be outlined in a separate decree. At this moment, there is no clarity about these rules.

On 18 September 2012 the State Secretary presented draft legislation to the Parliament in which it has proposed to abolish the thin capitalization rules. However, this legislation has not been adopted yet.

Background of the new legislation

In 2003 the European Court of Justice (“ECJ”) ruled about the deduction of interest expenses in case of financing of participations (Bosal-case). Before the Bosal-case, the rules were as follows:

  • The Dutch parent company could deduct the interest expenses related to its domestic participations.
  • However, the Dutch parent company was effectively not allowed to deduct the interest expenses relating to participations in other EU-member states. The ECJ ruled that this different treatment was in breach with the freedom of establishment of the EU Treaty. For this reason, the legislation was amended.

As of 2004, all participation financing expenses relating to participations were tax deductible. However, at the same time (as of 2004) a general thin capitalization rule was introduced (a maximum debt to equity ratio of 3:1) and limitations for the compensation of tax losses (relating holding- and finance losses) were introduced.

The new legislation entering into force as of 2013

As stated above, the Parliament has adopted new legislation.

As per 1 January 2013, a new rule for the denial of tax deduction of participation financing expenses will be introduced. Furthermore, it is intended to abolish the thin capitalization rule.

The calculation of the non-deductible participation financing expenses

According to the new legislation (article 13l Corporate Income Tax Act), excessive participation financing expenses are not tax deductible if and to the extent the annual amount of these expenses exceeds € 750,000. Participation financing expenses of € 750,000 or lower fall outside the scope of the new legislation; the amount of € 750,000 can be considered as a safe-harbour rule.

In case the annual amount of participation financing expenses exceeds € 750,000; it should be assessed how to calculate the amount of non-deductible participation financing expenses.

The new law provides for a mathematical approach. In order to determine the excessive amount of participation financing expenses, the average amount of the accumulated fiscal acquisition price of the subsidiaries must be compared with the average amount of fiscal equity. The historical or factual relationship between subsidiaries and loans is in essence not relevant (albeit the exception for loans linked to investments which can qualify as a true expansion of the group).

In case the average amount of the accumulated acquisition price of the participations exceeds the average amount of equity of the taxpayer, the excess amount is qualified as “excessive participation debt”. The amount non-deductible participation financing expenses is then to be calculated as the pro-rata share (excessive participation debt / total debt year-average) of the accumulated participation financing expenses.


The law offers various exceptions which allow a reduction of the “excessive participation debt” and which will thus provide for a lower amount of non-deductible participation financing expenses. The most important exception relates to loans which can be linked to a “true expansion of the group”. The expansion must relate to “operational” activities and should occur within a certain time frame preceding or after the date of investment.

If for example, an intermediary Dutch holding company acquires the shares in an existing Dutch or non-Dutch operational corporation from a third party, the purchase price of this new subsidiary plus associated acquisition costs, may be excluded from making the calculation of the excessive participation debt. If this new investment would be the only investment of the Dutch holding company, the amount of the non-deductible participation financing expenses would be zero (be it that other existing limitations for interest deduction can be applicable).

Based on the above, it is important to check whether the acquisition or increase qualifies as an expansion of operational activity. This will depend on the facts and circumstances in the case at hand. For instance: production, distribution and sales activities are considered operational activities. Passive investment is not an activity.

It is noted that this exception does not apply if the funding of the Dutch holding company is structured in such a way that the expense is also deductible elsewhere within the group (intentionally or not, which can be qualified as a double dip scenario) or if the structuring of the funding predominantly tax driven.

The double dip scenario may in particular occur if either:

  • hybrid loan instruments are used, or
  • if there is a mismatch in entity qualification (for instance as a consequence of the US check the box rules), or if
  • other group members are taxed on consolidated group basis (like for instance in the United Kingdom).

Other interest deduction denial rules

In case the interest expenses on debts are already non-deductible based on other interest deduction denial rules, these debts are not considered as debts for purposes of the participation financing expenses.

Exclusion foreign permanent establishments

The restriction of participation financing expenses does not apply to assets which fall under the object exception (for foreign permanent establishments of the Dutch holding company).

Exclusion active finance activities

In the legislation a special provision is included for active finance activities within the group.

Qualifying active finance activities will not affect the limitation of the deduction of participation financing expenses. Active finance activities are any activity by the taxpayer other than occasionally be performed in connection with the conducting of financial transactions through their own bank accounts on behalf of the taxpayer, together with its affiliated entities, with the number persons employed by the taxpayer, their powers and responsibilities in accordance with the nature and function of the taxpayer and the taxpayer also has an office that has the usual facilities in the financial sector.

Transitional provisions for existing holding companies

The law does not provide for a general grand farther rule. This means that the new legislation will be applicable to all Dutch corporate tax payers as of 1 January 2013.

The law does however provide for transitional arrangements for existing holding companies.

For the calculation the excessive participation financing expenses, 90% of the fiscal acquisition price of subsidiaries which were already acquired, extended or equity was contributed, at the beginning of the fiscal book year starting on or before 1 January 2006 may be deducted from the total acquisition price of the subsidiaries.