On April 14, and June 1, 2011, we informed you about the Tax Agenda that Deputy Minister of Finance, Mr. Weekers, had sent to the Lower House on behalf of the Cabinet on April 14, 2011. On June 23, 2011, we informed you about the proposals for the new business sector policy presented on June 17, 2011, by the Top Teams appointed by the Ministry of Economic Affairs, Agriculture, and Innovation. One of the topics discussed by the Head Offices Top Team was the participation interest (‘Bosal Gap’). On July 7, 2011, in connection with the temporary reduction of the real estate transfer tax, we reported that consideration was being given to various means including the closing of the Bosal Gap and the introduction of a bank tax, by which the budgetary cost of this measure could be met. In his letter of August 16, 2011, the Deputy Minister replied to further written questions from the Lower House on the Tax Agenda. In answer to a question on the subject, the Deputy Minister also discussed the bank tax that was announced on July 1, 2011.
Below we summarize the most relevant additions to the changes previously proposed by the Cabinet, concentrating in particular on the consequences for corporate income tax. Please refer to our earlier memos for more background on the Tax Agenda.
1. Acquisition holding companies
Revenue and impact
The preliminary outcome of an Impact Study carried out by KPMG Meijburg & Co based on information released earlier showed that the revenue from the acquisition holding company provision might exceed the publicly announced estimate. Partly in response to the questions from the Lower House, consultations took place between the Ministry of Finance and KPMG Meijburg & Co regarding the tax assumptions the two parties used as a basis. These consultations led to the conclusion that, based on further information provided by the Ministry of Finance regarding the details of the proposed measure, its impact is possibly smaller than the preliminary outcome of the survey indicated. It is possible that the ultimate form of the measure in the Tax Plan will affect the estimated yield of the Tax Agenda.
Effect of the measure
The Deputy Minister’s response to an example given by D66’s parliamentary members leads to the following conclusions regarding the operation of the acquisition holding company provision.
· The assumption on which the acquisition holding company provision is based is that the acquirer’s acquisition interest cannot be set off against the profit of the acquired business.
· If the acquirer has sufficient ‘own’ profit an acquisition, irrespective of whether a domestic or a foreign business is concerned, will not be affected by the interest deduction limitation.
· If the acquirer does not have sufficient ‘own’ profit, the interest deduction limitation will apply insofar as the non–deductible acquisition interest exceeds EUR 500,000 and the acquisition will generate an excess of debt. In the latter case, the debt/equity ratio (‘capital ratio’) of the fiscal unity between the acquirer and the business acquired after the acquisition is essential. It should be noted that the book value for tax purposes of participations not included in the fiscal unity must be deducted from the equity. If the capital ratio remains within the 2:3 ratio after the acquisition has taken place, the interest deduction limitation will not apply.
· A foreign company cannot be included in a fiscal unity and such interests must therefore be deducted from the equity, which would cause the capital ratio to deteriorate. If this leads to a capital ratio outside the 2:3 ratio, the interest deduction limitation will apply insofar as the non–deductible acquisition interest exceeds EUR 500,000 or the acquisition will generate an excess of debt. These ‘escapes’ will be applied separately, the lowest amount of non-deductible interest then being non-deductible.
· The interest deduction for the acquisition debt will therefore never cease to exist completely, but only insofar as the acquisition interest exceeds the acquiring business’s ‘own’ profit plus EUR 500,000 or insofar as there is an excess of debt.
· Please note that the letter does not answer the question whether interest-bearing receivables may be set off against interest-bearing payables for the application of the capital ratio.
Rebuttal provision ( debt/equity ratio, carry-over rule)
· When asked for a substantiation of the debt/equity ratio, the Deputy Minister stated that assessment of the question whether the interest deduction is excessive will be based on objective criteria to be laid down in the law. The assessment will take into account the debt/equity ratio of the taxpayer (fiscal unity).
· The determination of the standard will be based on a strict approach to acquisition holding constructions. An exception will be made for sound debt/equity ratios, on the basis of a strict 2:3 ratio.
· If the equity decreases as a result of losses suffered, this will cause the capital ratio to deteriorate (see above). The Deputy Minister’s answer to questions regarding temporary but nevertheless real losses is that he intends to take losses into account by including a carry over rule: non-deductible acquisition interest may be carried forward to future years. Once the acquirer’s own profit is sufficient once more in any future year, the acquisition interest carried forward may be set off against the profit in that year. It is not quite clear whether the carry over rule may be applied only in years in which a loss is suffered.
There will be no specific exception for management buy-outs. According to the Deputy Minister, the threshold of EUR 500,000 will spare acquisitions in, in particular, the small and medium-sized business sector as much as possible.
Own profit acquiring business and profit split
The Deputy Minister indicated that the acquisition holding’s own profit will be calculated by deducting the acquired company’s share of the profit of the fiscal unity (before deduction of acquisition interest) from the fiscal unity’s profit.
The profit split within a fiscal unity will need to avoid it being undermined by transferring the acquired company’s profit to the acquisition holding company or other businesses in the fiscal unity. In the Deputy Minister’s opinion, the rules governing the set-off of pre-entry losses for fiscal unities would provide a good model to follow.
Earlier, the Deputy Minister had indicated that acquisitions that took place before January 1, 2007, would be spared. In his letter of August 16, 2011, the Deputy Minister explained that the question whether acquisitions are subject to the proposed acquisition holding provision will be assessed by reference to the moment of the inclusion of the acquiring and the acquired companies in a fiscal unity, and not on the basis of the moment at which the acquisition debt is incurred. Refinancing of the acquisition debt does not change the time of the inclusion in the fiscal unity, and therefore does not affect the answer to the question whether an acquisition is subject to the acquisition holding company provision.
The Deputy Minister’s outline of the transitional rules could result in the interest remaining deductible under the acquisition holding company provision in situations in which inclusion in the fiscal unity took place before January 1, 2007, but nevertheless being caught in the event of a potential closing of the Bosal Gap (see par. 3) if the fiscal unity’s equity includes participations.
Risks under European law?
The Deputy Minister indicated that the acquisition holding company provision makes no distinction between Dutch and foreign investors. If a regular Dutch company wishes to acquire another Dutch company by means of an acquisition holding company, this acquisition will be subject to the acquisition holding company provision under the same conditions and in the same manner as an acquisition by a foreign investor. The possibilities of setting off the acquired company’ profits against the interest charges of the acquisition holding through a legal merger, division or formation of a fiscal unity are limited, irrespective of the nationality and place of residence of the shareholders of the acquisition holding company. According to the Deputy Minister, the fact that an acquisition holding company may subsequently lack a basis from which these interest charges can be deducted is a fact and not a consequence of the measure. The Deputy Minister therefore foresees no risks under European law on this point.
2. Source exemption for permanent establishments
For businesses that operate internationally, the implementation of a source exemption removes the timing benefit when reporting losses, because their foreign business operations are carried out through a permanent establishment rather than a subsidiary. It is envisaged that this measure will result in a more equal tax treatment with participations.
Although the Deputy Minister recognizes that the removal of the timing benefit is disadvantageous for the abovementioned international businesses, he expects the negative consequences for the business climate to be limited. The Deputy Minister argues that the losses can be deducted from the Dutch profit if the permanent establishment permanently ceases its activities. He also mentions the envisaged positive consequence for the business climate from channeling the tax revenue back to businesses, for example, by a lowering of the corporate income tax rate.
Risks under European law?
The Deputy Minister again states that he does not foresee the implementation of a source exemption for permanent establishments leading to issues of European law in respect of no longer permitting the deduction of losses – other than on termination − from a non-resident permanent establishment. Also, the proposed structure of this provision, which uses as its starting point the current methodology for profit determination, will not result in additional European law issues arising. The foreign exchange results relating to a permanent establishment will remain part of the Dutch tax base.
3. Participation interest (Bosal gap)/lowering of tax rate
Although the Lower House had explicitly asked for information on the structure and content of the proposed measure to close the Bosal gap, the Deputy Minister makes no further statements on this subject. The Deputy Minister suffices by noting that the Cabinet’s decision on the exact scope of this measure, and the other measures, will be made this month. In all probability, the full details of the plans will only become known once the relevant legislation is presented to the Lower House on or about Budget Day.
At present, it is therefore still unclear how much revenue this measure will generate. Because part of the total revenue generated by the tax base broadening measures, i.e. acquisition holding company, source exemption, and participation interest, will be used to temporarily lower the real estate transfer tax, it remains unclear what the available budget will be for, for example, the lowering of the tax rate; a corporate income tax rate of 24% has previously been mentioned.
4. No notional net worth deduction/addition to income for tax purposes
The Lower House had asked that the decision not to implement the notional net worth deduction and addition to income for tax purposes be further substantiated. The Deputy Minister has indicated that budgetary coverage would have to be sought through corporate income tax, which would probably mean having to increase the corporate income tax rate. However, this is at odds with the coalition agreement which focused on a lowering of the tax rate; it is also detrimental to the Dutch business climate.
5. Abolition of current interest deduction limitations?
The Lower House had asked if the current thin cap rules (Section 10d Corporate Income Tax Act) and the deduction limitation applicable to the acquisition or expansion of an interest in an affiliated entity (Section 10a Corporate Income Tax Act) would be abolished when the proposed measures are implemented. The Deputy Minister has indicated that it is too early to take a decision on this, and has made any abolition of the interest deduction limitation dependent on future considerations, including how the measure against the deduction of participation costs is structured. At any rate, the bill will take account of other concurrent interest deduction limitations provided for in the Corporate Income Tax Act.
6. Planning Tax Agenda
As previously mentioned, the Cabinet will decide in August what the exact scope of the measures will be. This will be included in legislation that will be presented to the Lower House on or about Budget Day, Tuesday, September 20, 2011. It is expected that the Tax Plan will be made public on Friday, September 16, 2011. It is not clear if this will also include the separate bill on corporate income tax.
In light of the above, the envisaged commencement of the measures described under 1 through 3 above, still appears to be January 1, 2012.
7. Bank tax
Although the introduction of a bank tax has not yet been officially included in the Tax Agenda, the Deputy Minister did discuss it in his letter of August 16, in response to questions raised by the Lower House. In a letter dated July 1, 2011, regarding budgetary coverage for the temporary lowering of the real estate transfer tax, the Cabinet made known its intention to introduce a bank tax; a precondition being a level European playing field. Although initially it was intended to wait for a proposal from the European Commission on the introduction of a European-wide tax, this no longer appears to be considered necessary. The European Commission’s proposal is also expected to be introduced after the summer. In his letter of August 16, the Deputy Minister announced that the aim is to introduce a separate bill on a bank tax in the last quarter of 2011, and for it to become law in 2012. No indication of a precise implementation date was given.
In his letter, the Deputy Minister discusses in broad terms certain aspects of the proposed bank tax:
· The tax base will be based on the liabilities reported in a bank’s balance sheet. The Deputy Minister makes clear that this refers to ‘non-protected debts’, i.e. the passive side of the balance sheet less the equity and the debts covered by the Deposit Guarantee Scheme. This would be consistent with the approach adopted by other EU Member States.
· It has been proposed to adopt a split rate − a higher rate would apply to short-term non-protected debts than would apply to long-term debts. The British bank tax also makes such a distinction. The Deputy Minister has not yet announced what these rates will be. However, three relevant factors are mentioned, i.e. the EU level playing field, the need to avoid impacting the organizational structure of banks, and the envisaged budgetary need of EUR 300 million.
· The information currently available from banks will be used as much as possible so as to limit the expected increase in the administrative burden.
· Consideration is being given to a minimum threshold.