On November 28, 2023 an interesting Decree of the Dutch Secretary of State for Finances of November 24, 2023 regarding the Earnings stripping measure (The Decree Earnings stripping measure) was published in the Dutch State Gazette. The Decree is a policy decision containing the policy for the earnings stripping measure as included in section 2.9a of the Dutch corporate income tax Act. The Decree will enter into force on November 29, 2023.
Since January 1, 2019 section 2.9a of the Dutch corporate income tax Ac 1969 contains a generic interest deduction limitation in the form of an earnings stripping measure. This measure was introduced by the Act that implemented the First EU Anti-Tax Avoidance Directive ATAD 1) in the Netherlands. The aim of the earnings stripping measure is to prevent profit shifting and base erosion through interest payments. In addition, the measure aims for a more equal tax treatment of equity and debt for Dutch corporate income tax purposes for all taxpayers.
The earnings stripping measure means that the balance of the interest expenses and interest income that are taken into account when determining the profit for Dutch corporate income tax purposes is non-deductible in so-far-as that balance exceeds 20% of the adjusted profit, or € 1 million if this is more than 20% of the adjusted profit. It should be noted that the aforementioned percentage of 20% applies for financial years starting on or after January 1, 2022. For the financial years 2019 to 2021, the percentage was 30%.
According to the Secretary of State the first experiences with the earnings stripping measure have led to this policy decision. The Coordination Group Tax Havens and Group Financing of the Dutch tax authorities is responsible for the unity of policy and implementation when applying Article 15b of the Dutch corporate income tax Act. The tax inspector submits cases in which a position statement could have precedential effect to the Coordination Group Tax Havens and Group Financing of the Dutch tax authorities.
In the Decree the Secretary of State, among other things, provides a further description and explanation of the following legal concepts:
Below we will discuss a few of the remarks of the Secretary of State that we found interesting.
Based on Parliamentary history an economic explanation is to be used with respect to the interest concept. Interest is in fact the compensation for making money available.
Becoming subjected to Dutch corporate income tax
If an entity becomes (partially) subjected to Dutch corporate income tax (for example because its place of effective management was transferred to the Netherland) the earnings stripping measure may (for the first time) become applicable to loans payable by of this entity. In such situation the payables and receivables of the entity and are stated at fair market value on the opening balance for tax purposes. Any premium or discount is charged/credited against the profit over the term of the receivables or payables by means of amortization/ accretion. This crediting or charging can either be based on the straight-line method or the effective interest method. To the opinion of the Secretary of State such amortization/accretion falls under the interest concept of Article 15b of the Dutch corporate income tax Act.
Loan agreements or agreements similar thereto
Financial lease and hire purchases are examples of an agreement similar to a normal loan agreement. The same can be said about purchases of which the purchase price is paid in installments. Other types of (purchase) agreements may, depending on the agreed delivery and payment terms also be comparable to a loan agreement in case the expiration of payment terms creates a situation that can actually be similar to a purchase in installments.
On the other hand rental agreements and operational leases are not similar to a loan agreement. The same can be said regarding a short-term supplier credit.
Design, Build, Finance, Maintain and Operate-contract (DBFMO-contract)
A Design, Build, Finance, Maintain and Operate (DBFMO) contract is a contract form in which the contractor is responsible for the design, construction, financing, maintenance and operation of a Public-Private Partnership (PPP) project. As of the moment the project is available for use, the client periodically pays a so-called availability fee. Part of the DBFMO contract is the so-called "financial model. This financial model shows which components of the availability fee relates to the repayment of the principal and which component relates to the interest charge. The contractor and client also process those components as such. Given the aforementioned, a DBFMO contract also comprises an agreement/component that is similar to a money loan.
Securities lending
With respect to securities lendings the Secretary of State notes that although securities lending is a form of consumer lending and the object that is being lent can be valued in money, securities lendings in principle do not constitute a loan agreement or an agreement similar thereto. The reason therefore is that the transaction does not involve the provision of funds and is not settled in cash. This is different if a securities lending agreement independently or as part of a set of legal acts actually involves a money loan.
Interest expenses without matching interest income
Article 15b, Paragraph 6 under b of the Dutch corporate income tax Act arranges that certain expenses qualify as interest expense. Whereas on the other hand the therewith related income does not qualify as interest income at the level of the recipient. The reason here for is unlike Paragraph 6 under c, Paragraph 6 under b Subsection (b) does not refer to income or positive benefits. In this respect the Secretary of State specifically mentions penalty interest and payment made for contingent liabilities.
IFRS 16
Another interesting remark that the Secretary of State makes is that IFRS 16 is not in accordance with the principles of sound business practices. Therefore if under IFRS 16 for Annual Reporting purposes under an interest component in respect of a lease payment/lease term that is due in the future is to be reflected in annual result, this does not affect the interest balance for the earnings stripping measure. Since as stated above IFRS 16 is not in accordance with the principles of sound business practice this therefore results in the commercially recognized interest component not being taken into account when determining (annual) taxable result for Dutch corporate income tax purposes.
The Secretary furthermore State furthermore elaborates on the determination of the adjusted profit. In this respect the Secretary of State focusses on the capitalized interest (the adding of the negative interest balance and the amortization of capitalized one-time financing costs and interest), depreciation and amortization.
The full Dutch version of the Decree Earnings stripping measure of November 24, of 2023 can be found here.
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