1 RECENT TAX DEVELOPMENTS IN THE NETHERLANDS Harmen van Dam Partner - Loyens & Loeff Rotterdam Tel Marieke Bakker Partner - Loyens & Loeff Rotterdam Tel

2 Contents Introductory remarks Consultation paper regarding : –flexibilization of holding company regime –introduction of special regime to attract group finance activities –overhaul of interest deduction limitations Budget 2010

3 Introductory remarks Business taxation has attracted unusual political interest: –Introduction of new regime for carried interest and excessive payments to management –Urge to further tighten interest deduction limitations for acquisition debt (especially privat equity structures) –Parliamentary questions regarding effective tax rate of Dutch headquartered multinationals

4 Consultation Paper June 2009 Three items: 1.Improvement of participation exemption 2.Introduction of 5% tax rate for group finance activities 3.Tightening of interest deduction limitation Entry into force January 1, 2010 (?) - Many comments and requests for amendments - Introduction delayed or transitional rules?

5 Consultation Paper – participation exemption First item: Improvement of participation exemption –Participation exemption historically cornerstone of Dutch international tax policy. –2007 shift from more subjective approach (“intention test”) to objective approach (asset and tax tests). Changes unintentionally resulted in uncertainties. –Proposal to re-introduce the pre-2007 “intention test”. As a fall-back the asset and/or tax test may be used. –Asset and tax test are amended.

6 Consultation Paper – participation exemption Intention test: –Exemption does not apply if held as “passive investment”, i.e. taxpayer’s purpose is to obtain a return that may be expected from ordinary asset management –If held for mixed purposes: determine where emphasis –Not a passive investment if held as part of the business: extension of taxpayer’s business, holding and intermediate functions –Passive investment by nature: fiscal investment constitution, certain group (re)insurance companies –Deemed passive investment: > 50% consolidated assets consist of shareholdings/ other interests of less than 5%, or Participation, together with 5 + % (in)direct subsidiaries, largely fulfils “group financing function” (including also provision of operating assets within group)

7 Consultation Paper – participation exemption Asset test General: - Participation passes the test if, generally, ≥ 50% of its assets are other than non-business related passive investments -Still requires allocation balance sheet, but test applies “generally” instead of “continuously”. And allows occasional, short term drop below 50% -If at least 70% of the assets of an entity are “good assets” than any passive investments of that entity will be considered “good assets” as well Three categories of passive investments (i) Ordinary passive investments: assets are not, within reason, necessary in connection with the business of the entity (e.g. excess cash, securities). Exceptions: - Assets income of which is subject to tax according to new subject-to-tax test - Immovable property - this is now a “good asset”, unless owned by a fiscal investment institution or a tax exempt investment institution

8 Consultation Paper – participation exemption Asset test - categories of passive investments continued (ii)Intra-group loans; except: - Assets the income of which is subject to tax according to the new subject- to-tax test, i.e. effective rate of 5% (plus anti-balance sheet stretching clause) - Intra-group loans held by active group financing company - Intra-group loans of which ≥ 90% funded using loans from third parties (iii)Operating assets of which (rights of) use is granted to affiliated entities, except: - Assets, the income of which is subject to tax according to the new subject-to-tax text - Assets held by entity with active grant-of-use activities - Assets of which at least 90% is funded using loans from third parties Hybrid loans: loans effectively functioning as equity no longer eligible for the participation exemption if included in the interest box

9 Consultation Paper – participation exemption Subject-to-tax test: –Direct subsidiary is liable to pay profit tax with a “regular” rate of at least 10%, which tax results in a “realistic levy” by Dutch standards –Regular rate of at least 10%: refers to normal statutory rate. Small in- or decreases of the rate not necessarily imply insufficient rate –Realistic levy: specific Dutch tax rules appear less relevant to determine degree of taxation liability –Finance companies: compare to 5% rate of the Dutch interest box –Different depreciation system acceptable –No real taxation if e.g.: tax holiday, cost-plus approach to minor taxable basis, deductible dividends, refund of CIT upon distribution, overly generous participation exemption

10 Consultation Paper – group interest box Second item: Introduction of 5% tax rate for group finance activities – interest box Previously proposed interest box: –Proposed to be effective 2007 –Available for all tax payers upon request –Ceiling: equity times certain rate –Forex results excluded from the box –Entity into force postponed pending EU State Aid procedure European Commission reluctant to approve the optional box. Dutch authorities agreed to amend to mandatory interest box and expand definition of “group”. On July 8, 2009, European Commission approved mandatory interest box.

11 Consultation Paper – group interest box Group interest is taxed/deductible at effectively 5% Mandatory, per tax payer (or fiscal unity) Group interest box items are also: - Indirect group loans (back to back) - Changes in value - Hedging instruments - Financing part of lease or rental installments - Funds/short term investments reserved for acquisition purposes (“war chest”)

12 Consultation Paper – group interest box Group companies: - Control (in stead of 1/3 interest stake) - Approach IAS 27 - Power to determine financial + operational policy - Right to income/incurring risks - Controlling rights of cooperating group are added up (IAS 31) - Family, joint venture, private equity structures - Facts & circumstances test, not optional

13 Consultation Paper – group interest box ‘Loans’ include agreements comparable to loan agreements: financial lease and hire-purchase agreements. Hybrid loan receivables included (currently: participation exemption) Finance component of intra-group rental income with respect to fixed assets also included. Disqualifying: loans relating to intra group transfer of assets (not being qualifying participations or group interest box assets), unless business reason.

14 Consultation Paper – group interest box If group creditor financed group loan with external debt: group interest box not applicable to group interest expense, i.e. deduction at 25.5% - Loans must meet the ‘parallelity requirement’. (Direct) external debt used to fund group interest box items: group interest box applicable to interest expense on external debt, i.e. deduction at 5%

15 Consultation Paper – group interest box Some observations: - ”Mismatch” for companies that borrow from group and onlend to/invest with third parties: income taxed at 25.5%, expense deducted at 5% - Indirect external debt deductible at 25.5% subject to the strict requirement of “parallelity” – difficult to meet. - Overlap other restrictions on deduction of interest

16 Consultation Paper – interest Third item: Tightening of interest deduction limitations Currently no restrictions for third-party interest, only for related party interest: Anti-base erosion rules: –Apply to interest connected with listed tainted transactions, such as conversions of equity, contributions to subsidiaries or acquisitions of subsidiaries. –Unless taxpayer has business motive for both the transaction and the funding structure. –If creditor is taxed at 10%, burden of proof for tax authorities. Thin-capitalization rules: - Allowed debt-to-equity ratios of 75% to 25%, or if higher, ratio of consolidated group.

17 Consultation Paper Why changing the interest deduction rules? –Highly leveraged acquisitions by buy- out firms: Deduction of interest under both bank debt and shareholder debt. Thin-cap restriction does not apply if fund is not part of consolidated group. Base erosion restriction may not apply in case of genuine acquisition (business motive). –Existing mismatch: Interest under acquisition debt deductible, but Connected income from foreign subsidiary exempt. NL Holding NL Target Buy-Out Fund Bank NL Holding Foreign Target Bank NL trade

18 Consultation Paper – interest deductions Option 1: two measures (i) Interest relating to participations - Finance expense re participations and group interest box items is not deductible insofar > € 250,000 - Disallowed amount: average tainted debt average total debt - Tainted debt is average book value of a. participations /25.5 of group interest box assets minus b. fiscal equity + losses /25.5 of group interest box assets So equity first allocated to participations and box assets x total financing expense

19 Consultation Paper – interest deductions (ii) Interest related to acquisitions and fiscal unity - Finance expenses re the acquisition of a subsidiary that is subsequently included in the fiscal unity: only deductable to amount of acquiring company’s “own profit” - Exceptions: - expenses insofar < € 250,000 - fiscal d/e ratio < 3:1 - Carry forward of excess interest: 9 years

20 Consultation Paper – interest deductions Option 2: Earnings Stripping -Interest not deductible if > 30% of EBITDA and > € 250,000. Balance of all interest income and expense, whereby box interest included for 5/25.5 and carry forward interest included -Carry forward of excess interest: 9 years -Exceptions: - Taxpayer not part of group - Commercial d/e ratio of tax payer is not less favourable than that of group

21 Budget 2010 Changes in participation exemption as of 2010 Nothing included on interest box and deductibility of interest Election for loss carry back for 3 years (instead of 1): consequence carry forward restricted to 6 years (instead of 9) Royalty/innovation box effective tax rate to 5% and no longer a cap Amendment dividend withholding tax (Norway/Iceland)