The Netherlands is a country which is often integrated in international tax structures, mostly due to its advantageous tax regime, overall beneficial tax treaties and its well organised / reliable infrastructure. Often these tax structures are set up for holding and/or finance activities between related parties. During the years a lot of corporate income tax legislation, policy and case law has been published with regard to the deductibility of interest for Dutch tax purposes. In some cases certain ‘loans’, which were labelled as such by the tax payer, have been succesfully requalified by the Dutch tax authorities as being capital.
Furthermore as of the year 2004 the so called ‘thin capitalisation (thin cap)’ rules have been taken up in the Dutch corporate income tax legislation. If these Thin cap rules are applicable, they could lead to a situation in which part of the payable interest to related parties is non tax deductible due to the applicable debt to equity ratio (1/3 -/- € 500,000). This thin cap legislation unfortunately will, in certain situations, lead to overkill. However if structured carefully these thin cap rules could in most cases (partially) be avoided. As part of the tax plans for 2013, launched on September 18th 2012, the Dutch government is planning to abolish the thin cap legislation as per the year 2013.
Recently the Supreme tax court has given some guidelines on the latest addition to tax deduction restricted loans, the so called ‘non businesslike loan (onzakelijke lening)’. Although a non businesslike loan is still considered to be a loan for tax purposes, it is not possible to write down such a loan by the creditor for tax purposes. The interest on a non businesslike loan will in principle remain deductible, all be it only at a ‘normalised’ percentage.
The check whether it regards a non businesslike loan is to be in principle (retroactively) made on the moment this loan was first granted. If the loan is qualified as non businesslike, it is possible to adjust its conditions at arm’s length, e.g. increasing/decreasing the interest percentage to a businesslike standard. The height of this businesslike interest percentage is however maximized. For example if an interest percentage of 35% is required to make the loan businesslike, it would still not be considered businesslike as it tends to be profit sharing (capital).
In short a non businesslike loan will in principle exist when no other third party creditor would have granted the loan at a businesslike interest percentage, e.g. due to the fact the debtor (shell company) can not give any security and does not hold sufficient assets. As mentioned above, in case the loan is qualified as a non businesslike loan the interest will be normalised. With normalised the supreme court means the renumeration the debtor would have paid to a third party when the related party (the creditor) would have been the guarantor for this third party.
The abovementione case law on the non businesslike loan also applies on comparable situations for the Dutch personal income tax. It may lead to serious overkill in certain specific situations in the personal income tax.
This case law on the non businesslike loans (onzakelijke lening) is fairly recent. This means some aspects remain unclear, although in the literature it has been discussed at some length by now. Also new case law on this subject is published frequently and will be for some time. The tax authorities have stated they welcome requests for certainty upfront, which is of importance as the moment the loan is closed is leading.
We can assist you with all your queries on the tax structuring of loans through the Netherlands. Please contact us for a first non obligatory check of your pending or planned loan agreements.
Jan-Hein van Leeuwen