Any expense that a company incurs in its normal business practice is in principle deductible, as in accordance with sound business practice. In addition to this general principle, the law explicitly states various categories of expenses that are deductible. These categories are:
- Profit-dependent rewards for directors and other personnel for their work;
- Profit-dependent fees with regard to the use of patents or commissions as long as they are not paid to shareholders, members or participants as such;
- Remunerations from insurance companies to the insured based on the insurance contract; and
- Incorporation costs as well as costs relating to changes in the capital; and
- The profit share paid to the general partner of an open commanditaire vennootschap (open limited partnership).
At the same time, the law provides for a number of explicit limitations on deductibility of specific categories of expenses. Hence, the following items are not deductible for corporate income tax purposes:
- Profit distributions, other than those explicitly mentioned as deductible;
- Payable distributions based on the articles of association or similar documents, other than those explicitly mentioned as deductible;
- The corporate income tax as well as foreign income taxes insofar a treaty or unilateral arrangement for the prevention of double taxation applies. In case no arrangement is available to prevent double taxation, it is possible to deduct these foreign taxes as costs;
- Costs relating to the issuance of shares, stock options or similar rights to a related company or employees that earn more than a certain salary (EUR 598,000 for 2022), in case the value of these shares, stock options or similar rights is predominantly directly or indirectly dependent on fluctuations in their value;
- Costs for yachts that are used for representational purposes, unless the principal activity of the taxpayer is connected to yachting;
- Monetary fines imposed by a Dutch criminal court as well as amounts paid to the Netherlands government to settle pending cases;
- Monetary fines imposed by a body of the European Union; and
- Various fines with regard to violations of law, including traffic fines, misdemeanors or felonies Not only penalties and fines paid to the Dutch government but foreign fines and penalties are also disallowed.
In case the company has employees, there are also certain costs the deduction of which is limited. The limitation concerns costs for foodstuffs, beverages and luxury products, representation activities (such as receptions, parties and entertainment), and travel and accommodation costs (i.e. in relation to seminars, symposia, study). The limitation amounts to either 0.4% of the taxable salary of all employees with a maximum of EUR 4,800, or 73.5% of the actual expenses.
There are various rules governing the deductibility of interest, with the aim to prevent group companies from eroding the Netherlands tax base through financing constructions. In principle interest due on loans, bonds or other forms of debt is deductible as a normal business cost. However, case law determined that loans granted under certain conditions may be classified as equity for tax purposes. As a consequence, the interest deduction is then denied because the remuneration for the capital contribution does not qualify as interest but as a non-deductible dividend.
The main rule is that the legal form and title of a transaction are leading in its characterization. However, a transaction legally entered into as a loan may be qualified as equity for tax purposes in case:
- The loan is deemed to be an informal capital contribution;
- The loan is subject to the so-called richtige heffing or fraus legis-doctrine, unless the person that receives the interest is subject to taxation at a sufficient rate; and
- The interest is, in fact, a hidden profit distribution.
A loan is recharacterized as an informal capital contribution in case it is granted under such conditions that it should be regarded as equity. Case law has defined that this is the case when a loan:
- Has a term of 50 years or more;
- Gives the right to a remuneration that is almost entirely dependent on the profit; and
- Is subordinated to all other loans of unsecured creditors.
A similar recharacterization also occurs where a company grants a loan to a subsidiary, whilst it is certain or almost certain at the moment of the transaction that, due to the situation of the subsidiary, the loan wholly or partly will never be paid back. The last possibility of requalification is that, even though the transaction took the legal form of a loan, both parties did not have the intention to provide a loan at the time of the transaction.
he law prescribes that it is not allowed to deduct interest on a loan as well as changes in the value of the loan in case the loan was given under such conditions that it factually functions as equity of the taxpayer.
Furthermore, it is not allowed to deduct interest, including costs and currency exchange results, with regard to loans due to related persons or corporations, to the extent these loans are connected with:
- A profit distribution or payback of equity by the taxpayer to the related party;
- An equity contribution by the taxpayer, a related company or person into another related person; or
- The acquisition or expansion of participation by the taxpayer or a related company or person, in another company to the extent this other company becomes related as a result of the acquisition or expansion.
The aforementioned limitation on interest deduction does not apply if the taxpayer can prove that the debt and related legal acts are predominantly based on business considerations, or in case the taxpayer proves that the person that received the interest is subject to a profit tax of at least 10% (without any loss compensation whatsoever being applicable).
A related corporation is defined for these purposes as:
- A company in which the taxpayer has a 1/3 interest; or
- A company that has a 1/3 interest in the taxpayer; or
- A company in which another party has a 1/3 interest, whilst this last party also has a 1/3 interest in the taxpayer; or
- A company which forms a Netherlands fiscal unity with the taxpayer.
A corporate taxpayer is also related to a natural person in case the natural person has a 1/3 interest in the corporate taxpayer or a related corporation.
In order to counter tax evasive structures where investors act as a cooperating group but formally do not qualify as an affiliated entity due to the holding requirements specified above, the Dutch government expanded the scope of 'affiliated entity' in its 2017 Tax Plan. Effective 1 January 2017, the expanded scope seeks to cover entities that although independently do not hold 1/3 of the shares but are part of a group of companies/ cooperating group working together (e.g. private equity, joint acquisition).
Where a loan has been provided to a related party for purpose of acquisition of shares, any interest paid on such related party loan is deductible only if based on valid commercial reasons (business motive test). Further, in case of lending transactions involving multiple related party entities (resident and/ or non-resident), the Dutch Supreme Court has held that in order to qualify for the interest deduction, the reasons of all parties involved in the transaction must meet the business purpose test. Effective from 1 January 2018, a double motive test has been introduced which requires taxpayers to demonstrate that indirect third-party loans have valid business reasons.
On 15 July 2022, in two similar cases, the Dutch Supreme Court held that the deductibility of interest payments made by a Dutch fiscal unity to its private equity investors / shareholders cannot be denied under the interest deduction limitation rule. In both cases, international private equity funds acquired Dutch target companies through Dutch acquisition holding companies held by Luxembourg holding companies. To finance the acquisition, the Luxembourg holding companies issued preferred equity shares to the international private equity funds. The proceeds were used to fund the Dutch acquisition holding companies with equity and shareholder loans. The Dutch acquisition holding companies acquired all the shares in the Dutch target company, forming a Dutch fiscal unity (i.e., a corporate tax group) with the Dutch target company. As a result, interest payments on the shareholder loans granted to Dutch acquisition holding companies by the Luxembourg holding companies could be set off against the operating profits of the Dutch target company. On an appeal filed by the Dutch tax authority, the Supreme Court held that the funds used for the acquisition were not rerouted within a group in a non-commercial manner. The funds were obtained by the Luxembourg holding companies from international private equity funds that were not related to the Dutch acquisition holding companies as none of the funds or fund investors held at least 1/3rd interest in Dutch acquisition holding companies (threshold for being a related company as given above).
The Supreme Court also provided further guidance on non-businesslike loans and observed that in general, if a creditor runs a credit risk that independent parties would not have accepted in return for a fixed interest, such loans are considered non-businesslike and write-offs on the non-businesslike loans are not deductible for tax purposes.
The Dutch tax authority also claimed that if the interest deduction limitation rule does not apply in these cases, then the abuse of law ("fraus legis") principle should apply. However, the Supreme Court referred the cases to the Courts of Appeal to rule on this argument.
Note that the tax years under consideration before the Supreme Court were pre-2017. As a result of the introduction of the cooperative group rule effective from 1 January 2017 (as mentioned above), for the tax years after 2017, the outcome could be different if the international private equity funds are considered as a cooperative group in relation to their investments made in the Dutch acquisition holding companies.
In another case law, the CJEU ruled that the Dutch interest deduction limitation rule violates the EU freedom of establishment. The case involved restriction of interest deduction claimed by a parent company established in an EU Member State in respect of a loan taken from a related company in order to finance a capital contribution to a subsidiary established in another EU Member State. Since the loan was connected with the capital contribution in a subsidiary, the limitation rule was applied disallowing the interest deduction. The Court observed that the limitation rule could only be avoided by a Dutch parent with a Dutch subsidiary, which could form a fiscal unity. Hence, if the subsidiary is established in the same Member State, the parent company could avail itself of the interest deduction by forming a tax-integrated entity with it. The Court held that the difference in treatment constitutes an infringement of the freedom of establishment and is, therefore, a violation of EU law.
Following the above judgment by the CJEU, the Netherlands published the repair measures for the country's fiscal unity (tax consolidation) regime on 16 May 2019 (see Sec. 5.3.). As a result, effective retroactively from 1 January 2018, the above provisions apply as if no fiscal unity exists.
When determining the taxable amount of a taxpayer, the paid or received interest or royalties with related parties as mentioned above may not be taken into account in case the taxpayer is not liable to a sufficient risk with regard to those transactions. A taxpayer is deemed to bear sufficient risk in case the equity available to cover the risk is the lower of 1% of the outstanding loans or EUR 2,000,000. Also, the amounts of interest and/or royalties that are not at arm’s length will be subject to adjustment.
Finally, where a taxpayer receives from a related party a loan with no repayment date or with a repayment date exceeding 10 years after the receipt of the loan, whilst no or a below arm’s length interest is charged, then the interest paid and value changes are not taken into account when determining the result of the payer.
The Dutch thin-capitalization regime has been abolished effective from 1 January 2013. The rules applied until the tax year 2012. The main rule was that in case the debt to equity ratio of a taxpayer exceeded 3:1, the corresponding interest over the excessive debt is non-deductible. The manner in which these calculations should be made is fairly complex with various exceptions. Because of the fact that the rules have now been abolished, no extensive further explanation will be given.
The thin-capitalization rules were replaced by provisions limiting the deduction of interest on debts that are deemed to be related to the financing of participations as well as interest on excess acquisition debt.
In relation to debts deemed to be related to the financing of participations, provision limits the deduction of interest and financing costs that are connected to the purchase of participations when this interest exceeds an amount of EUR 750,000. This so called 'excessive participation interest' (bovenmatige deelnemingsrente) is determined by the following formulae:
[(Average participation loans ÷ Average total loans) x (Total interest in excess of EUR 750,000)]
The average participation loans are the amount with which the purchase price of the participations exceeds the equity of the taxpayer. It can never be higher than the total amount of all loans nor the total amount of the purchase price of the participations. The limitation introduced by this provision does not apply with respect to loans used to finance the start-up and/or expansion of operational activities or to fund the operational activities. Where the activities of the taxpayer consist of active financing activities, the limitation does not apply subject to additional conditions.
Deductibility of interest on excess acquisition debt is restricted if the acquisition debt is in excess of 60% of the acquisition price (reduced by 5 percentage points annually for seven years, down to 25% in the eighth and subsequent years). The provisions also provide that the interest expense can only be deducted from the acquiring company’s profits – i.e. profits of the target company which was included in the fiscal unity are not considered for deductibility of interest. However, these restrictions do not apply if the interest expense does not exceed EUR 1 million. As part of the 2017 Tax Plan, the government sought to address certain loop-holes in the current regulations regarding excessive acquisition debt by enacting the following amendments:
- The existing rules covered only acquisition debt obtained by the acquiring company. However, with the amendments, the government seeks to cover “debt-push-down” transactions as well. Under this, interest will not be allowed to be deducted where the acquisition debt is assumed by the target company;
- Under the existing rules, companies’ interest is deductible on debt up to 60% of the acquisition price (gradually reduced to 25% over the years). However, companies were able to reset the allowance back to 60% in the subsequent years, by transferring the target company to another acquisition vehicle in the group. Under the amended provisions, companies will no longer be able to reset the allowance back to 60%, if the target company is transferred within the group; and
- The existing rules contained a grandfathering provision which provided that the rules would not apply to existing fiscal unities up to 14 November 2011. The amended rules now seek to deny the benefit of the grandfathering provision if the acquisition company is included in a new fiscal unity headed by a different parent company.
Effective 1 January 2019, a general interest deduction restriction is introduced which is in line with EU Anti-Tax Avoidance Directive (ATAD). Accordingly, the deduction of all interest expense is restricted to 30% of earnings before interest, tax depreciation and amortization (EBITDA) and excess interest can be carried forward to subsequent years. The rule is not applicable in the following cases:
- If the interest expense for the year does not exceed EUR 1 million; or
- If the interest expense pertains to debt financing of long-term public infrastructure projects.
Effective from 1 January 2020, an interest deduction limitation (also called minimum capital rules) is introduced for banks and insurers, which limits the deduction of interest on loans received to the extent that the loan capital exceeds 92% of the balance sheet total i.e., no deduction is allowed on interest due on loan capital exceeding 92% of balance sheet total.