On December 16, 2013, the Deputy Minister of Finance announced by letter that banks will be able to deduct, for tax purposes, the return on additional Tier 1 capital, even if it was issued after January 1, 2014.

Hybrid capital instruments (i.e. additional Tier 1 capital) consisting of both equity capital and debt can, to a limited degree and subject to conditions, be included in the core capital. Hybrid instruments are distinguished on the basis of their innovative character, i.e. whether or not specific conditions apply that act as an incentive for early repayment. For tax purposes, the Netherlands regards additional Tier 1 capital that is issued under the current capital requirements framework as debt, which means that the return is tax deductible.

As of January 1, 2014, the Capital Requirements Directive will apply, on the basis of which additional Tier 1 capital that is issued after January 1, 2014, can no longer be regarded as debt. The related interest will therefore no longer be deductible. However, in his letter of December 16, the Deputy Minister indicated that banks will be able to deduct, for tax purposes, the return on additional Tier 1 capital, even if issued after January 1, 2014, and that this will be taxed at the recipient.

If you would like more information about the tax treatment of additional Tier 1 capital or about developments in the banking sector, please contact Niels Groothuizen or Michèle van der Zande.

Click here to download the memorandum in pdf format