TAX NEWS - DECEMber 2009

Netherlands Tax: Government announces plans for anti-base erosion measures and puts interest box on hold

The Netherlands State Secretary of Finance published a letter on 5 December 2009 that further clarifies planned amendments to the Corporate Income Tax Act. The State Secretary announced several measures in the letter, but also indicates that certain previously proposed measures will be reconsidered and postponed. The letter follows the extensive plans announced earlier this year in a consultation document on corporate income tax reform.

The following items are significant:

- An "acquisition holding" measure will be introduced to limit the deductibility of interest costs relating to "excessively debt-financed" acquisitions if the holding company and the acquired company are joined in a fiscal unity. In contrast to the general thin capitalization rules, this measure will also target interest paid on third-party debt. It is expected that "excessively debt-financed" for these purposes will refer to debt that exceeds a 3:1 debt-to-equity ratio, but goodwill likely will be included in the equity component, which would be beneficial for affected taxpayers.
- No measures are to be introduced in the near future that will affect the current mismatch between income from subsidiaries that are fully exempt under the participation exemption and the deductibility of (interest) costs on loans used to finance such subsidiaries.
- A special tax finance regime, like the earlier suggested 5% interest box under which group interest would be deductible and taxable at a rate of 5%, is not likely to be introduced in the foreseeable future.
- A technical change to the exemption rules for foreign permanent establishments (PEs) will be introduced, which will result in foreign PEs being treated for tax purposes in a manner similar to that of foreign subsidiaries (profits exempt, losses not deductible). This change will eliminate the possibility to (temporarily) import foreign PE losses into the Netherlands.

Although no introduction date for the above measures is suggested, it is expected that they will become effective on 1 January 2011.

In addition to the above measures, important relaxations of the conditions to apply the participation exemption were separately adopted in the annual budget plan for 2010. In principle, the participation exemption should apply if the taxpayer does not hold its participation as a "portfolio investment." Alternatively, the existing "asset" and "subject to tax" tests are still available and significantly relaxed. The participation exemption changes are effective as from 1 January 2010.