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In today's business world, companies can choose from various group financing options, such as intercompany loans, equity contributions, hybrid instruments, cash pooling and other forms. The Netherlands offers significant tax advantages for companies, but what should you consider when deciding on the best form of group financing? This article is the first in a series that will explore various financing options and evaluate their advantages and disadvantages from a Dutch tax perspective.
This article is written by Pauline Çobo ([email protected]) and Rafi Mardroos ([email protected]). Pauline and Rafi are part of RSM Netherlands International Consulting Services with a focus on International Taxation.
Before evaluating which financing option is best for your business, it is important to assess your financial needs. Consider how you plan to use the funds: Are you looking to finance new projects, expand existing ones, or invest in new machinery or other long-term assets? Think about the purpose of the funds, the required capital amount, and the conditions and repayment terms that align with your business objectives. The next step would be to assess your financial position by examining key figures such as revenue, profit, cash flow, and existing debt obligations.
Exploring Intra-Group Options
The nature of the funding is important for tax purposes, as debt and equity have different tax implications. Interest payments are generally tax-deductible for the borrowing entity and considered a business expense, but they are treated as taxable income for the lending company. In contrast, capital contributions are usually not deductible because they are distributions of profit rather than expenses. However, if the participation exemption applies, they may be exempt from withholding tax if certain criteria are met. Additionally, losses incurred by the lending company are generally tax-deductible, whereas losses incurred on shares may be exempt and non-deductible for tax purposes.
Transfer Pricing Considerations
For intercompany loans, it is important that the repayment terms and interest rates adhere to the arm's length principles as outlined in the OECD Guidelines. This means the terms and interest rate should be consistent with market rates and reflect what an independent third party would accept under similar conditions and circumstances. The arm’s length test for intercompany loans starts with the characterization of those transactions, to assess and determine whether it should be regarded as a loan. Proper documentation, including a loan agreement that specifies the principal amount, interest rate, repayment terms, and any collateral or financial guarantees, is important to mitigate tax and transfer pricing risks. By ensuring that intercompany loan terms and conditions align with the arm's length principle, companies can reduce the risk of tax adjustments and potential disputes with tax authorities.
Interest Deduction Limitation on Intercompany Loans
Under Dutch tax law, intercompany loans are categorised as businesslike or non-businesslike loans, affecting the tax interest expense deduction as per Article 10a of the Corporate Income Tax Act (CITA 1969). According to the Dutch Supreme Court, a loan may qualify as businesslike if it meets certain criteria: it is properly documented, the interest rate and repayment terms are set in accordance with the at arms’ length principle, collateral or financial guarantees are provided, the loan is granted between related parties and has a business-driven motive (e.g., expansion of a project or acquiring new assets). In this case, the interest expense is considered deductible for tax purposes. On the contrary, the loan is deemed non-businesslike, meaning that a related party has accepted a debtor risk that independent parties would not have accepted.
Consequently, the impairment is not tax-deductible, and the interest payment deduction is restricted under Article 10a of CITA. According to the Supreme Court, this provision is not applicable to external debt. The term “related party” refers to companies and individuals that meet certain criteria. A company is considered related to another if it holds at least one-third of the capital in the other company, or vice versa, or if a third party holds at least one-third of the capital in both companies. Companies that are part of the same fiscal unity are also deemed related. Additionally, an individual is considered related to a company if they hold at least one-third of its capital, or if they hold a similar interest in a company connected to it. This includes also companies in a collaborative group with a combined interest of at least one-third in the company.
Conditional WHT on Interest
Since January 1, 2021, The Netherlands has applied a conditional WHT of 25.8% on interest payments from Dutch companies to affiliated entities resident in low-tax jurisdictions with a statutory corporate income tax rate below 9%, to jurisdictions of the EU list of non-cooperative jurisdictions or to affiliated entities with more than 50% voting rights. The WHT is withheld at the payer level and levied on the recipient. If WHT is not correctly applied, the tax inspector may issue an additional assessment to the recipient of the interest payment. Besides direct payments, the conditional WHT can also apply to artificial structures primarily set up to avoid Dutch WHT.
EU Mandatory Disclosure regime for cross-border transactions "DAC6"
The DAC6 (Directive on Administrative Cooperation) is an EU directive that came into effect on June 25, 2018, that requires intermediaries and taxpayers to report potentially aggressive cross-border tax arrangements. The burden of proof lies with the intermediaries and taxpayers to ensure that these arrangements are reported if they meet certain criteria known as "hallmarks" and if the main benefit test is satisfied. A cross-border arrangement typically involves at least one EU jurisdiction alongside one or more non-EU jurisdictions. If the transaction involves one jurisdiction or is limited to non-EU jurisdictions, it is not considered cross-border in nature and, therefore, not reportable.
However, not all cross-border transactions are reportable unless they meet one of the DAC6 hallmarks listed in Annex IV of the EU Directive. Some of the hallmarks are linked directly to the main benefit test, which requires evidence that obtaining a tax advantage is the primary benefit of the transaction. In case the intercompany loan involves two different jurisdictions, as mentioned above, it is considered a cross-border arrangement. It may be considered reportable if it results in tax benefits or involves hybrid mismatches. Non-compliance with DAC6 can result in significant fines and penalties.
Forward Thinking
As companies navigate the complexities of the group financing landscape, it is important to adopt a proactive approach by regularly reviewing internal documentation and integrating tax risk management into financing strategies to identify and mitigate potential risks. Given the ongoing changes, it is necessary to stay informed about recent developments in tax structuring and to ensure compliance with regulations such as DAC6, ATAD2, and other relevant EU legislation.
RSM is a thought leader in the field of International Tax consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.