October 26, 2011, was the last time we discussed the interest deduction limitation measures for corporate income tax purposes that the Cabinet intends to introduce. Below, we set out the latest developments regarding this issue, based on:
· the parliamentary debate held by the Lower House Finance Standing Committee (“committee”) on October 31, 2011;
· the written reply by the Deputy Minister of Finance (“Deputy Minister”) in his letter of November 3, 2011 to questions raised by the committee;
· the parliamentary debate held on November 7, 2011;
· the written reply by the Deputy Minister in his letter of November 11, 2011, to additional questions by the committee;
· the fifth Memorandum of Amendment to the Tax Plan 2012, as appended to the letter of November 2011.
Interest deduction limitation acquisition holding companies
The rules to date
In brief, not taking into account the fifth Memorandum of Amendment, the interest deduction limitation measure for acquisition holding companies (Section 15(ad) Corporate Income Tax Act 1969; “Section 15(ad)”), functions as follows. In the first place, the acquisition interest is deductible up to the amount of the ‘own profit’, i.e. the fiscal unity’s profit less that part of the profit attributable to the acquired company/companies that have been included in the fiscal unity. If the acquisition interest exceeds the own profit, but the excess amount is less than EUR 1 million (franchise), then the interest will still be deductible in full. If the acquisition interest exceeds the own profit and the excess amount is more than the EUR 1 million franchise, then the interest that is, in principle, deductible will amount to the franchise increased by the own profit. The excess will not be deductible, unless the fiscal unity’s ‘debt-equity ratio’ does not exceed a specific margin (the ‘thin cap escape’). This ratio is 2:1.
Serious disadvantages of the thin cap escape are, that the value of participations held by the fiscal unity must be deducted from the ‘equity’, interest-bearing payables and receivables are not to be set off when applying the ratio, and the operating debts of the acquired company are included when determining the ‘debt’.
An alternative for the thin cap escape and the fifth Memorandum of Amendment
In the memorandum regarding the report on the Tax Plan 2012, the Deputy Minister earlier expressed the Cabinet’s sympathy for the alternative proposed by the Dutch Association of Tax Advisors (“NOB”), i.e. a transaction-related approach.
In this approach, the question whether an acquisition was financed with excessive debt is answered on the basis of the acquisition debt and the acquisition price. The acquisition debt may not exceed a specific percentage of the acquisition price (“the alternative escape”). This approach would replace the thin cap escape mentioned earlier, where an excess of debt is determined on the basis of the debt/equity ratio after the acquisition, i.e. at the level of the fiscal unity.
Advantages of the alternative escape are that the non-acquisition debt will not influence the interest deduction in respect of the acquisition, the repayment of the acquisition debt will result in a relatively higher interest deduction, and the fact that the acquisition price is known will make clear at an earlier stage to what extent the taxpayer will be subject to Section 15(ad). The NOB’s proposal assumed a percentage of 65, to be reduced by 5% per year over a 13-year period. However, after consultation with the Confederation of Netherlands Industry and Employers (VNO-NCW) and the NOB, and for budget-related reasons, the Deputy Minister chose to propose an alternative to the Lower House to the effect that the acquisition debt may not exceed 60% of the acquisition price in the year of acquisition, and that this percentage subsequently declines by 5% over a 7-year period to 25%. This is the alternative as included in the bill by means of the fifth Memorandum of Amendment.
Pursuant to the amended bill, therefore, the acquisition debt does not have to repaid in full. In the case of multiple acquisition debts, in particular where these relate to companies included in the fiscal unity in different years, the excess acquisition interest must be repaid for each of those years separately. Acquisition debts and acquisition prices regarding acquisitions that are included in a fiscal unity in any one year are combined. The maximum percentage applicable for any one year will be applied to the sum total of all acquisition prices in that year. The outcome will then be compared with the total of all remaining corresponding acquisition debts at the end of the financial year. The foregoing means that, during the ownership period of an acquired company that is included in a fiscal unity, a detailed record must be made as to which acquisition price and which debt or remaining debt relates to which acquisition, and in which year an acquisition took place.
In relation to
The fifth Memorandum of Amendment also amends the phrase ‘in relation to’. Acquisition debts exist where they are related directly or indirectly, either by law or by fact, to the acquisition or expansion of a participation in one or more companies. Section 15(ad) therefore follows the phrasing used in the current anti-abuse provision against the creation of interest charges within a group in Section 10a Corporate Income Tax Act 1969.
Grandfathering
In the parliamentary debate on November 7, 2011, the CDA raised questions regarding the desirability of an amendment for fiscal unities that are set up in the period immediately preceding the entry into force of Section 15(ad). In his letter of November 11, 2011, the Deputy Minister stated that he considers the anticipatory effects to be limited. He estimated that, at most, acquisitions in an advanced stage will be accelerated in order to be able to include them in the fiscal unity before January 1, 2012. The Deputy Minister noted that there may be instances where the deduction limitation possibly can be avoided, but that, on the other hand, the buyer’s desire to bring an acquisition forward may result in the seller asking a higher price. The current situation appears to be, that the Deputy Minister does not see the point of adjusting the grandfathering to take account of anticipatory behavior. At the same time, however, the issue has not been written off just yet, and may still be discussed in the plenary debate.
Bosal interest
The Cabinet is still preparing a ‘Bosal gap’ proposal that was approved by the Lower House earlier this year, under which the deduction of participation interest would be limited. In reply to further questions raised by the Lower House, the Deputy Minister meanwhile explicitly stated that he does not consider unabridged implementation of the proposal possible, taking into account European law on the one hand and the damage to the tax business investment climate on the other. The objective of the rule is therefore to ‘only’ affect undesirable constructions, without unnecessarily adversely affecting the business investment climate. In his letter of November 3, 2011, the Deputy Minister gave an example of such an undesirable construction. A taxpayer acquires an affiliated subsidiary from its top holding company (internal restructuring) and finances the acquisition sum with a loan. The sale proceeds are used elsewhere within the company. The consequence of this construction is, that a financing burden is created in the Netherlands in order to meet a financing requirement elsewhere within the group. The Deputy Minister considers this an undesirable situation.
The Deputy Minister expects to be able to send the separate bill on participation interest to the Lower House in the course of 2012. The plenary debate on the Tax Plan 2012, which Section 15(ad) forms part of, will take place on November 15 and 16, 2011. The vote on the Tax Plan 2012 will take place on November 17, 2011. The plenary debate in the Upper House has been planned for December 12 and 13, 2011.