Doing Business in the Netherlands 2012 - American Chamber of ...

18.6 Limitations on Deductions of Interest
Doing Business in the Netherlands 2012
This section provides an overview of certain restrictions on the
deduction of interest expenses, considering certain peculiarities of
hybrid loans.
18.6.1 Article 10a, Dutch Corporate Income Tax Act
Interest payments (including related costs and foreign exchange
results) in relation to “tainted debt” are disallowed under Article 1 0a
of the CITA 1969. Tainted debt is basically a debt incurred from an
affiliated company or individual (e.g., the shareholder) in order to (i)
fund a profit distribution, (ii) make a capital contribution in a related
entity (e.g., a participation of at least 33%), or (iii) acquire shares in
another entity (which is or becomes a related entity as a result of the
acquisition).
The interest expense in relation to this tainted debt is not deductible,
unless:
a) it can be demonstrated that the contribution of loan capital
instead of equity is largely based on business reasons (the
business reasons criterion is used to exclude tax-driven
schemes from eligibility for interest deduction; the saving of
taxes will not qualify as a business reason); or
b) the interest payments are effectively taxed in the hands of the
creditor at a rate of 10% in accordance with Dutch tax
standards – the so-called “compensatory tax exception” (the
use of loss carry forward is not allowed; if the tax inspector
can argue that the payments will not be effectively taxed due
to losses or claims arising in a current year or in the near
future, no compensatory tax will be deemed to exist).
As of 2008, this “compensatory tax exception” no longer applies if the
tax authorities can reasonably establish that the loan, or the transaction
in connection with which the loan was given, has not predominantly
been entered into for business reasons. This means that meeting the
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