On October 24, 2011, the Deputy Minister of Finance sent the memoranda prepared in reaction to the reports accompanying the Tax Plan 2012 to the Lower House. The memoranda contain his reply to the questions raised by the Lower House regarding the Tax Plan. The memoranda are accompanied by a number of Memoranda of Amendment. Below we discuss the main features of the various memoranda as they relate to corporate income tax, dividend withholding tax, and the 30% ruling.
Corporate income tax
Interest deduction limitation acquisition holding companies
To ensure that the amendments and the further explanations of the bill are correctly understood, we will begin by outlining the main features of the previously announced interest deduction limitation measure for acquisition holding companies in respect of corporate income tax (Section 15ad Corporate Income Tax Act 1969; “Section 15ad”).
Section 15ad as it currently stands (bill and Explanatory Memorandum)
An interest deduction limitation for acquisitions will apply to financial years beginning on or after January 1, 2012, if the acquisition has been debt-financed and the acquiring party and the target entered into a fiscal unity for corporate income tax purposes on or after January 1, 2012. Section 15ad also applies to interest relating to financing received from third parties. The main features of the deduction limitation are as follows:
1. Acquisition interest is first of all deductible up to the amount of the ‘own profit’. Briefly put, this profit is determined by deducting from the fiscal unity’s profit that part of the profit attributable to the acquired company/companies and the company/companies added to the fiscal unity.
2. If the acquisition interest is more than the own profit, but the excess amount is less than EUR 1 million (“franchise”), then the interest will still be deductible in full.
3. If the acquisition interest is more than the positive 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 positive own profit, with any excess being non-deductible. However, please refer to 4 and 5 below.
4. If the excess amount is more than the franchise and the positive own profit, then the acquisition interest is still deductible in full if the fiscal unity’s debt-to-equity ratio remains within a set margin (“thin cap escape”). This ratio is 2:1. The value of the participations held by the fiscal unity must also be deducted from the equity; this also applies to the tax reserves and assets held by foreign permanent establishments qualifying for the source exemption. Interest-bearing payables and receivables are not to be set off when applying the ratio. In determining the total equity, the ‘goodwill gap’ will be repaired, although the goodwill that is to be added to the equity will be depreciated in equal installments over a ten-year period.
5. If the conditions of the thin cap escape are not met, then the non-deductible interest will be set at the lowest of the following amounts:
a. acquisition interest less positive own profit minus EUR 1 million;
b. acquisition interest multiplied by the excess debt divided by the acquisition debt. The sum of that fraction must not be higher than 1.
Acquisition interest that is non-deductible in any year will be transferred to the following year, where it will again be assessed to see if it falls under the interest deduction limitation. In respect of the interest carried forward, the EUR 1 million franchise and the thin cap escape are not taken into account again.
Amendment (Third Memorandum of Amendment)
The new measure (“Section 15ad”) has been amended to include not only acquisitions, but also the expansion of an interest. In addition, the measure will also apply to the liquidation of the acquired company after it has been included in the fiscal unity. In that case, the acquired company and the fiscal unity that has been created with the acquired company are, for the purposes of Section 15ad, considered as continuing and the liquidation of the acquired company’s assets is considered as not having taken place.
The original bill did not contain rules for the way in which the targets’ profits had to be determined for purposes of deducting such profit from the fiscal unity’s profit. The Memorandum of Amendment solves this issue by also making the profit-apportionment rules that currently apply to the calculation of pre-fiscal unity results also applicable to Section 15ad. This means that the profits attributable to the targets must be calculated on the basis of the targets not forming part of the fiscal unity (“independent enterprise approach”).
Explanation (Memorandum in response to the report)
In addition to the abovementioned amendments, the Deputy Minister also replied to the numerous questions raised by the Lower House and third parties. The most important replies are discussed below.
· An alternative. The Deputy Minister has confirmed that an acquisition that is not itself excessively debt-financed can still be caught by the new measure depending on the target’s debt‑to-equity ratio. The Deputy Minister has indicated a willingness to look into the alternative proposed by the Dutch Association of Tax Advisors (Nederlandse Orde van Belastingadviseurs; “NOB”) regarding a transaction-related approach instead of an approach at the level of the fiscal unity. The transaction-related approach requires that the question whether an acquisition has been excessively debt-financed be answered in relation to the acquisition debt and the acquisition price, whereby the acquisition debt must not be higher than a certain percentage of the acquisition price. The NOB’s proposal assumes a percentage of 65%, to be subsequently decreased by 5% each year. The advantage of this approach is 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 higher interest deduction, and the fact that the acquisition price is known will make clear to what extent the taxpayer will be subject to Section 15ad. The Deputy Minister has indicated that he will seriously consider this proposal should the Lower House choose this alternative. The Cabinet will analyze the feasibility of this proposal without delay.
· Interest. The Deputy Minister has, on the one hand, confirmed that, in addition to costs, also positive and negative foreign exchange results will fall under the definition of ‘interest’. At the same time, he is of the opinion that a positive balance for foreign exchange results and acquisition interest should be included in the fiscal unity’s taxable profit, and would be included in own profit from which the interest pursuant to Section 15ad that has been carried forward can be deducted.
· In relation to. According to the Deputy Minister, if the acquiring company takes out a loan in order to take over the existing debt of the acquired company, this must be regarded as an informal capital contribution, given that the acquired company performs no services in exchange for the debt being taken over. This informal capital contribution can qualify as the acquisition or expansion of an interest, depending on the facts involved. If this is the case, this will involve a loan relating to the acquisition or expansion of an interest and the loan will be regarded as acquisition debt for the purposes of Section 15ad.
· An interest. The new provision assumes the acquisition or expansion of ‘an interest’. The Deputy Minister has indicated that ‘an interest’ also refers to indirect participations. The profit earned by a 100% subsidiary of the target that has been included in the fiscal unity at a later stage is not to be regarded as own profit.
· An interest. The acquisition or expansion of an interest as referred to in Section 15ad does not relate to the situation where a company takes out a loan in order to acquire a receivable on a subsidiary in the fiscal unity.
· An interest. An option agreement can involve the acquisition or expansion of an interest as referred to in Section 15ad, but this is dependent on the agreement’s provisions.
· Acquisition debt. A loan taken out by a company added to the fiscal unity and used as a capital contribution to finance business operations and other acquisitions, is not regarded as acquisition debt as referred to in Section 15ad insofar as this does not involve the acquisition or expansion of an interest in a company added to, or to be added to, the fiscal unity.
· Acquisition debt. According to the Deputy Minister, the acquisition debt cannot be split into a part relating to the acquired company that is included in the fiscal unity, and a part relating to its participations that are outside the fiscal unity.
· Own profit. For the purposes of Section 15ad, all successive acquisitions are combined. According to the Deputy Minister, this means that a company’s profit in respect of acquisition debt that has not yet been completely repaid is not yet available as own profit. In other words, acquisitions that are completely financed with equity, or in respect of which acquisition debt has been repaid, will contribute to the own profit. The profit of all companies acquired or added to the fiscal unity before January 1, 2012, will contribute to the own profit, regardless of how they are financed.
· Own profit. The Deputy Minister clarified that if a company is added to the fiscal unity during a financial year, the determination of the own profit will only involve the fiscal unity’s profit for that particular year.
· Thin cap escape (debt). The Deputy Minister does not consider it necessary that payables be set off against receivables when applying the thin cap escape. According to the Deputy Minister, such activities increase the possibility of being able to deduct the acquisition interest. This would mean a fiscal unity is ‘penalized’ for performing financing activities in the Netherlands which achieve a positive margin.
· Thin cap escape (debt). Payables on which no interest at all is reported, will not be regarded as debt. This also applies to part of a related payable for which the total interest is not deductible pursuant to Section 10a Corporate Income Tax Act 1969. As regards payables for which the interest is partly deductible, it will not be possible to only take part of this debt into account. Such payables must be considered in their entirety as debt.
· Thin cap escape (equity). One of the questions raised in respect of the submitted bill is whether the fiscal unity’s equity will be made good, i.e. repaired, as regards a goodwill gap created when an acquisition that is entirely financed with equity is added to the fiscal unity. The answer, according to the Deputy Minister, is no. The goodwill gap will therefore only be repaired in respect of acquisitions for which the acquisition holding company provision is applicable. A goodwill gap created as a result of an addition to the fiscal unity before January 1, 2012, will also not be repaired.
· Thin cap escape (equity). The equity for tax purposes will also include debt that, for tax purposes, is regarded as equity.
· Carried forward interest pursuant to Section 15ad. If the fiscal unity is terminated in relation to the acquired company, the carried forward interest available at that time can be set off without restriction against the profit of the former parent company. It is not clear if this profit includes the profit of any remaining companies added to the fiscal unity.
· Foreign permanent establishments. The Deputy Minister has confirmed that a foreign permanent establishment’s assets and profit are not taken into account when calculating the excess of acquisition interest and when determining the own profit.
· Transitional rules. The Deputy Minister has confirmed that the retrospective effect also applies to future refinancing of the acquisition debt and legal mergers taking place within fiscal unities formed before January 1, 2012.
· End date. The Deputy Minister has confirmed that Section 15ad will no longer apply once the acquisition debt has been repaid and when the acquired company leaves the fiscal unity. The acquisition holding company provision will therefore continue to apply as long as the acquisition debt and the acquired company form part of the fiscal unity.
Bosal interest
The Cabinet is still looking into the ‘Bosal gap’ proposal that was approved by the Lower House earlier this year, under which the deduction of participation interest would be limited. The Cabinet will thereby take into consideration the advice received from the Head Offices Top Team to safeguard the Dutch tax business investment climate. That bill will also deal in more detail with the various existing interest deduction limitations.
The budgetary revenue from the resolution of the Bosal gap issue will, on the one hand, be used to finance the temporary lowering of the real estate transfer tax on homes, while, on the other hand, it will be used for the lowering of the corporate income tax rate as laid down in the Coalition Agreement. It is not clear to what extent or from when the rate will be lowered.
Cooperatives and dividend withholding tax
Under the bill, cooperatives can, in specific situations of abuse, become subject to dividend withholding tax. How the membership rights are qualified within the cooperative is thereby also an important factor. The Deputy Minister has confirmed that the bill does not envisage a change to current administration policy. Existing cooperatives that have been set up under that policy will not become subject to dividend withholding tax under the new provisions. The new provisions also provide for the possibility to request confirmation from the Dutch Revenue that a cooperative does not have a withholding obligation.
Amendment of the 30% ruling
Current legislation on the 30% ruling requires that the person requesting application of the ruling prove they possess a specific expertise and that this expertise is scarce on the Dutch labor market. The Tax Plan 2012 has introduced a salary threshold of EUR 50,619 (EUR 72,313 including the tax-free allowance) that will apply to this specific expertise. The introduction of this salary threshold as an eligibility criterion for the 30% ruling has been criticized on many fronts. The Deputy Minister of Finance has decided not to accommodate this criticism and stands by his proposal. Employees who do not meet this threshold can, however, receive a tax-free reimbursement of the actual extraterritorial costs incurred.
Under the new legislation, an employee meeting the salary threshold will be assumed to possess expertise that is scarce on the labor market; an assumption that can be made sooner than is currently the case. However, an exception is made for specific professional groups where all the employees meet the new salary threshold. By way of example, the Deputy Minister of Finance refers to professional football players: in such cases the scarcity criterion will always have to be assessed.
Under current legislation, employees temporarily seconded to the Netherlands within a group are considered to have met the criteria of specific expertise and labor market scarcity. The Tax Plan 2012 does not mention whether this condition will continue to apply. The Deputy Minister of Finance has now indicated his intention to maintain the ‘group rotation provision’, but still provided that these employees also meet the salary threshold. The added value of maintaining the group rotation provision is therefore extremely limited and only amounts to removing any uncertainty relating to the fulfillment of the scarcity criterion.
Employees who live within a 150 kilometer radius of the Dutch border will no longer be eligible for the 30% ruling. This new assessment criterion has been introduced to avoid the ruling from adversely effecting Dutch citizens on the labor market in the border regions. This proposal also remains unchanged.