Financing through loan capital Fiscal aspects in an international context Bas Opmeer Athens, 4 February 2011

Presentation subjects  The consequences of the financial crisis on public finance  Debt finance versus equity finance  Anti-avoidance measures  Substance over form  isn't debt finance in fact to be qualified as equity finance and what are the potential consequences thereof  Takeover structures across the border  Thin cap measures

Consequences of the financial crisis  Pressure on governments to reduce fiscal deficits  Countries are deliberating a cross-the-board review:  For example The Van Weeghel government commission in the Netherlands The Mirrlees Review in the UK  Relevant in terms of corporation tax: Rates Tax base  An important element here is the fiscal treatment of loan capital

Consequences of the financial crisis (2)  Directions of thought: Treat loan capital and equity capital equally by: Introducing an Allowance for Corporate Equity (ACE) Making interest expenses non-deductable (Comprehensive Business Income Tax)

Debt versus equity finance Debt finance means:  Interest as allowance for loan capital is a cost item and as such deductable  Generally deductable at the regular corporation tax rate  Internationally, interest is generally taxed much lower (can be structured)  This means deduction at high rate, taxation at low rate Equity finance means:  In principle, no deduction possible for corporation tax  CFC regime may be applied when integral taxation is too low  Besides corporation tax, equity finance usually leads to double taxation (income tax, dividend withholding tax)

Conclusion Debt finance is often (much) more attractive than equity finance

Anti-avoidance measures Regarding:  Thin cap measures  Earmarking loan capital as equity capital on certain occasions  Affects both the interest deduction and the deductibility of a loss for the loan capital provider.  Not permitting interest deductions in connection with: Takeover structure aimed at creating a deductible flow of interest Payment and loan-back of dividend (acknowledgement of indebtedness dividend)

Anti-avoidance measures (2) Have to be in line with international regulations (?)  European law: Parent/subsidiary directive and Interest/royalty directive Freedoms under the EC treaty Arbitration Convention: Article 4.1  OECD model treaty: Article 9 Articles 24.4 and 24.5

Substance over form Can be observed in:  Earmarking loans as equity capital financing on its own  Examples: Loans that, in effect, act as equity capital, particularly on the basis of the conditions or circumstances under which they are taken out Back to back financing Conduit structures  Takeover structures

Thin cap measures Often used by governments as (safeguard)  clear anti-avoidance measure Basic principles:  Extent of affiliation of companies may be relevant.  Debt/equity ratios on the balance sheet  method may differ per country.  When debt/equity ratios are exceeded, interest is fully or partially non-deductible  method may differ per country.  P&L infers what the relevant interest on loan capital is, whose deductibility must be restricted.  Maximisation to intercompany interest?