The move is a trend mirrored around Europe as governments
look for ways to raise revenue and trim deficits.
If passed, the measure would apply from January 1 2013 and
would mean that taxpayers cannot deduct interest expense on
excessive debt. There are no grandfathering provisions.
Response to Bosal
The Bill is a response to the Bosal ECJ case, which affirmed that
the distinction in treatment of interest expenses between Dutch
subsidiaries (for which the interest expense was deductible)
and foreign subsidiaries (for which the interest expense was
not deductible) contravened the European principle of freedom
As a result, interest expense related to foreign
subsidiaries became deductible in the Netherlands from January
1 2004. As part of the nation’s fiscal tightening,
the Dutch parliament sent a proposal to government in June 2011
to solve the issues created by Bosal. The main problem
was that taxpayers could deduct interest expenses related to
loans taken to finance their participations, while at the same
time benefitting from the participation exemption because
income derived from qualifying participations is exempt.
The legislative proposal – estimated to reduce the
Dutch budget deficit by €150 million ($190 million)
– would restrict participation interest expense
deductions where the taxpayer’s debt level
relating to subsidiaries is excessive. This would apply to
interest expenses relating to loans taken out from both related
and third-party creditors, and the deduction would also apply
regardless of whether the taxpayer is using the loan to finance
a Dutch or a foreign participation.
The proposal has been met with optimism because the
restrictions are preferable to more stringent earnings
stripping rules which could have been considered.
"In general the reaction has been positive as the
calculation method is easy and most companies will not be
affected by the proposed bill," said Marc Sanders, partner at
VMW Taxand. "No earnings stripping or other more severe
alternatives will be introduced."
Wider European trend
"Going forward, EU governments will have to raise taxes
where they can and where they are not raising taxes, implement
more tax discipline in areas like interest deductions and using
losses," said Conor Hurley, of Arthur Cox in Ireland.
Sweden is one country that has already recently taken action
in this regard.
"In March, the Swedish government proposed new legislation
which will entail further restrictions on the deductibility of
interest expenses on inter-company loans," said Peter
Utterström, partner at Delphi, in Stockholm.
Sanders said he would not be surprised if the trend
continues to be taken up around the continent, with the Dutch
legislation providing a possible blueprint for other
"My experience is that a lot of countries look at the
Netherlands for ideas on new rules for restrictions on interest
deductions, so we may therefore also export this one.
Restrictions on interest deductions are certainly a trend in
Europe," said Sanders, who also referenced recent changes in
Spain that are more severe and include earnings stripping
There may be further related legislation released by the
Dutch government, and Sanders said the elimination of thin
capitalisation rules for Dutch law is being "seriously
considered". He said this would be beneficial for Dutch-based
companies and would reduce the administrative burden.
The legislation details a formula that would determine
whether or not a company is excessively leveraged. If the
combined acquisition price of the qualifying participations is
greater than the equity of the company, the participations will
be deemed to be excessively leveraged.
There is a €1 million threshold contained in the
legislation whereby interest expenses up to this amount will
not be affected by the proposal, and therefore will remain
"The €1 million threshold provides relief for small and
mid-sized companies. The main relief for Dutch-based
multinationals and Dutch holding companies is the so-called
expansion participations. These are excluded for the
calculation method from the value of the participations," said
Many companies will fall outside of the scope of the new
rule, but taxpayers still need to assess the likely
implications for their specific situation, and enact changes
before the proposed implementation date of January 1 2013 if