Updated decree on interest deduction limitation for debts to affiliated entities
Publication date 23 April 2013
As of March 25, 2013, a new decree applies in respect of Section 10a Corporate Income Tax Act 1969 (Section 10a). Section 10a limits the amount of interest that can be deducted in respect of debts to an affiliated entity. Amended legislation and new case law has meant that the old decree from 2005 has had to be updated. Moreover, the Deputy Minister of Finance has taken a number of new positions in the decree.
Section 10a in brief
Section 10a limits the amount of interest that can be deducted if a debt relates to:
· a profit distribution or a refund of paid-up capital to an affiliated entity or a related individual;
· a capital contribution to an affiliated entity;
· the acquisition or expansion of an interest in an entity that becomes an affiliated entity after the acquisition or expansion.
In short, affiliation requires at least a one-third interest. Interest can be deducted if one of the rebuttal provisions are met, i.e. a double business motivation test or a compensatory tax test.
The decree at a glance
The key issues dealt with in the new paragraphs are:
· The amount of paid-in capital (the financial interest) is decisive in determining the question of affiliation, but the share in the issued capital (the degree of control) can also be important.
· A capital contribution that is left outstanding at the time of incorporation leads to affiliation at the moment the contribution is made.
· Section 10a can apply to multiple entities in cases of successive outstanding capital contributions.
· With regard to the acquisition of an interest that takes place in stages, if there is a series of transactions Section 10a will apply as of the moment an affiliation exists. In such situations, Section 10a will then apply in respect of earlier transactions.
· According to the decree, a debt as referred to in Section 10a is still present in those cases where an interest is sold without the debt being repaid. The decree contains an approval/concession for certain situations.
· With regard to the double business motivation test, the decree deals with the relationship between external financing procured by the group and internal financing provided by the taxpayer and when these are sufficiently connected. The double business motivation test is not met in situations of non-business motivated diversions. The decree interprets this term broadly and includes several examples.
· The compensatory tax can, in certain circumstances, also be applied to an ultimate shareholder or the next intermediary.
· The decree contains an approval/concession for interest income that is partially effectively subject to tax.
· If the creditor is included in a foreign consolidation regime it still needs to be checked whether the interest income continues to be taxed.