January 2004 - Association of Dutch Businessmen

KNOW YOUR TAX
In order to level the open market playing field, the
EU has been trying to harmonise the Member States
tax systems for years. As far as indirect taxes are
concerned, the effort has been rather successful
with all EU countries adopting similar VAT systems.
In respect of direct taxes (i.e. income taxes), the
harmonisation has been less successful. This is caused by
the fact that Member States do not like to give up their
sovereign powers when it comes to direct taxation.
Direct taxation is by many States considered to be an
important policy instrument (e.g. fiets van de zaak etc.).
Furthermore, any proposal relating to the harmonisation
of direct taxation requires unanimous approval. This
delays matters further.
There has however been a strong proponent in
furthering the harmonisation of the Member States’ tax
systems and that is the European Court of Justice (ECJ).
Taxpayers in the Member States can invoke the EU
legislation directly and if a Member State’s tax system is
considered not to be in
line with EU legislation,
Bosal case
the Member State is
required to amend its
domestic legislation.
The ECJ has recently
used this ‘power to
By Olaf Botermans destruct’ with respect to the Dutch tax system. The Court
& Pieter de Ridder
decided that one of the oldest features of the Dutch
Loyens & Loeff
corporate income tax system caused an infringement to
Singapore
the EU treaty. The non-deductibility of costs relating to
qualifying subsidiaries with foreign activities was held
incompatible with the ‘freedom of establishment’ as
codified in the EU Treaty.
Income from qualifying
subsidiaries is exempt in the
Netherlands. Expenses relating to
such a subsidiary are non deductible,
unless the subsidiary generates profits
which are taxable in the Netherlands
(‘13 (1) expenses’). The ECJ’s line of
reasoning was that it should not make
a difference whether the subsidiary
generates taxable income in the
Netherlands or any other EU State.
Following ECJ’s decision, the
Dutch government submitted a
proposal of law to the Dutch
parliament on October 13, 2003.
The proposal, which intends to limit
the budgetary consequences of the
Court’s decision contains thin
capitalisation rules and a measure aimed at ring fencing
prior and future year losses claimed by Dutch holding
companies. These tax losses (not to be confused with
commercial losses!) are the result of the fact that the
income from the qualifying subsidiary will be exempt in
the hands of the holding company, while on the basis of
Income from qualifying
subsidiaries is exempt in
the Netherlands. Expenses
relating to such subsidiary
are not deductible, unless
the subsidiary generates
profits which are taxable
in the Netherlands (‘13 (1)
expenses’).
the Bosal case, the interest will be deductible. The
proposal furthermore deletes the provision dealing
with the non-deductibility of expenses relating to
qualifying subsidiaries.
Instead, the thin capitalisation rules disallow
interest deductions on excessive debt financing.
Interest on loans from related parties is in principle
considered excessive to the extent that the debt-toequity
ratio of the taxpayer exceeds 3:1. For purposes
of calculating the debt-to-equity ratio, all loans and
receivables must be netted against each other at the
beginning and the end of the year. Then, the average
of the two net debt positions is taken into account
for purposes of calculating the ratio. Equity is defined
as the average fiscal equity at the beginning and the
end of the year. If the average (net) debt-to-equity
ratio exceeds 3:1, the interest relating to excessive
debt-financing is not deductible for corporate income
tax purposes. In addition to determining the holding
company’s debt to equity ration on a stand-alone basis,
the debt to equity ratio of the group to which the
holding company may belong may also be applied.
It is important to note that these thin
capitalisation rules only apply to qualifying holding
companies. For this purpose, a holding company is a
company which is for 90 percent or more engaged in
holding participations and financing related entities.
A company is not a holding company if it has at least
25 full time employees engaged in non-holding
activities.
Under the loss ring fencing rules, losses incurred
by a holding company may only be utilised against
income in a year in which the
taxpayer also qualifies as a
holding company. In addition, in
the year in which the loss is
utilised, the positive difference
between the book value of the
receivables on related parties
and the book value of the
payables to related parties may
not have increased when
compared to the year in which
the loss was incurred, unless the
taxpayer establishes that such
increase was not incurred with
a view to utilising the loss.
It is important to note that
before the Bosal case, 13 (1)
expenses were not deductible.
As such, no tax loss would arise.
Under the thin capitalisation rules, tax losses may arise
as a result of the deduction of expenses falling within
the prescribed debt-to-equity ratio. The resulting tax
losses may provide an interesting tax shelter for
income which would otherwise have been taxable
in the Netherlands.
The above intends to provide you with a general understanding of tax developments in the Netherlands. The
above should not be regarded as a substitute for appropriate detailed advice.
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Vol.14 • No. 1 • January 2004