Source: WFR 2016/13

Author: Bauco Suvaal

These are exciting times for Section 13l Corporate Income Tax Act 1969, the relatively new (three years old) provision in the corporate income tax that restricts the excessive deduction of interest related to the financing of participations (participation interest). What are the implications of the final OECD report on BEPS Action 4 of the anti-BEPS directive? And also the CJEU judgment in the Groupe Steria case? The implications of the bill on the Fiscal Unity Amendment Act, which is currently being debated by the Lower House, are more specific. With regard to Section 13l, the bill provides for the addition of two new sentences to Section 13l(4), which, when applied, will lead to the reduction of capital for the purposes of Section 13l.

In this article, the author discusses the proposed amendments and addresses the overlap between Section 13l and the fiscal unity between sister companies (sister FU) and the fiscal unity between a parent company and a sub-subsidiary (Papilllon FU). The author concludes that the new second sentence of Section 13l(4) does indeed lessen the most obvious negative effect of a Papillon FU on participation debt. The new third sentence comes into play if foreign taxpayers are part of a fiscal unity. The above increases the complexity of the bill. The author tries to bring this into line using a ‘three-pronged approach’. The complexity is largely due to the use of the expression ‘mutatis mutandis’, which, in the author's view, too easily passes the parcel to those applying the law. For the benefit of the subsequent stage of the parliamentary process, the author arrives at various conclusions (hopefully to be confirmed by the Deputy Minister of Finance), as well as some specific recommendations in order to clarify Section 13l(4) and bring it more in line with its spirit and intent.