In June 2009, the Ministry of Finance published a Consultation Paper with a package of possible amendments to Dutch corporate income tax. The consultation process resulted in a large number of reactions from the business sector on various elements of the interest proposals. On December 5, 2009, Deputy Minister of Finance De Jager sent a letter to the Lower House, outlining the current status of both elements.
Mandatory group interest box
The Deputy Minister believes that the group interest box requires further investigation. This will be carried out by a study group established earlier this year by the Ministry of Finance (‘Tax System Study Committee’). This committee includes independent tax academics. According to the Deputy Minister, the main issue in the proposed legislation lies on the deduction side. The fact that effectively only 5% of the paid intra-group interest is deductible adversely affects foreign investors in particular, and will have a detrimental effect on new (foreign) investment in the Netherlands. The proposed group interest box has, as such, been withdrawn because the Deputy Minister only wants to introduce a group interest box if the investment climate can be safeguarded.
Interest deduction limitations
The Deputy Minister indicated that the proposals for Bosal repair (limitations on the deduction of interest on loans related to participations, hereinafter referred to as ‘participation interest’) and earnings stripping are withdrawn for the time being. Both of these elements will be forwarded to the Tax System Study Committee. The Deputy Minister decided to take this approach in order to continue the review of the possible risks of infringing EU Treaty freedoms by introducing these interest deduction limitations in their current form.
The Deputy Minister does, however, want to take measures against the use of acquisition holding companies, where an acquisition holding company and a Dutch target company form a fiscal unity. This measure will affect interest, both on intra-group loans and external loans related to the acquisition. According to the Deputy Minister this interest can, in principle, only be deducted from the acquisition holding company's own taxable profit and not from the target company's taxable profit. A safe harbor will be provided which, in general, will allow for an unlimited interest deduction if a specific debt/equity ratio is met. The Deputy Minster announced that this proposal will also take into account the ‘goodwill gap’ that could be caused by the consolidation for tax purposes which occurs upon entering into a fiscal unity.
Foreign permanent establishment loss deduction
This is a completely new issue. The Deputy Minister is proposing that losses from permanent establishments are no longer deductible from the world-wide profit. Losses on the cessation of a foreign business would remain deductible. In exchange for this measure, and in the context of preventing double taxation (thus for foreign profits), the subject to tax requirement for the ‘active’ permanent establishments would be eliminated. The Deputy Minister believes that, in this way, he can achieve a more equal treatment of foreign participations and foreign permanent establishments.
The anticipated follow-up
The Tax System Study Committee is expected to report in the second quarter of 2010 on the outcomes of the study. The proposals with regard to acquisition holding companies and losses from foreign permanent establishments will be presented in greater detail in a Bill that is expected in the Lower House in the spring of 2010.