The Cabinet’s tax agenda – Acquisition holding companies

On 14 April 2011, Deputy Minister of Finance, Mr. Weekers, presented the Tax Agenda to the Lower House on behalf of the Cabinet. The Tax Agenda sets out the Cabinet’s position on changes to the tax system. Key terms are ‘simplification’, ‘a sounder basis’, and ‘fraud-resistant’. Work and business must become more profitable. In his letter of May 26, 2011, the Deputy Minister replied to written questions from the Lower House on the Tax Agenda.

Below, I specifically focus on summarizing the Cabinet’s proposals for changes aimed at acquisition holding companies. The Tax Agenda is not yet a definitive bill, but provides an outline of the measures that are set to become legislation in the near future. It also describes ‘guideline scenarios’ that still require further elaboration and discussion.

Expansion of tax base
The Cabinet had already indicated in the coalition agreement that it intended to expand the tax base in respect of corporate income tax and to reduce the corporate income tax rate. The just published Tax Agenda sets out these intentions in more detail. The Cabinet’s intention is that the current proposals will end the uncertainty that has arisen as a result of the drawn out discussions on the difference between the tax position of multinationals and other businesses. The Cabinet inter alia intends to bring this discussion to a close by tackling the presumed imbalance regarding acquisition holding companies.

Reduction of tax rate
The Cabinet intends to channel the revenue made available by the expansion of tax base measures back to businesses by lowering the tax rate. A tax rate of 24% is considered achievable. Currently, a 25% tax rate applies to profits of more than EUR 200,000. The Deputy Minister considers the maximum corporate income tax rate to be one of the most distinctive features of a tax regime. In the Tax Agenda the Cabinet emphasizes that the economic climate should be supported by a lower tax rate.

Acquisition holding companies – Which rules are proposed?
The Cabinet has proposed a measure to prevent takeovers of Dutch businesses by foreign investors that are excessively debt-financed, and whereby the interest is deducted from the Dutch profit. An acquisition holding company is often used for such takeovers. The acquisition holding company enters into the debt, after which a fiscal unity is formed with the acquired business. This construction allows the holding’s interest costs to be deducted from the acquired business’ profits, so that despite already existing deduction limitation measures, no taxable profit remains.

To tackle this situation, a deduction limitation for acquisition holding companies has been proposed. The intention is to prevent excessive interest deductions while, at the same time, sparing genuine financial relationships. The proposal means that the fiscal unity can no longer offset the interest relating to the takeover against the acquired company’s profits, but only against the profits of the acquisition holding company itself. The aim is to put a 'tax brake' on what the Cabinet regards as an imbalance, whereby the acquirer of a Dutch business excessively burdens this business with debt. Of importance is that this restriction applies to both group interest and third party interest.

To spare relatively minor takeovers, the first EUR 500,000 of interest will remain deductible. This limitation will also only be applicable to the extent that the fiscal unity’s equity/debt ratio does not exceed a debt/equity ratio of 2:3. A similar mechanism is currently included in the thin cap rules, where less a less strict ratio of 1:3 is applied. Still to be looked into is how situations where the equity has become negative, for example, due to a recession, should be taken into account Under the proposed deduction limitation, the value of participations will be deducted from the equity. The ‘goodwill gap’ has also been taken into account. This is a decrease in the equity for tax purposes that arises because untaxed gains and reserves belonging to the acquired business are eliminated when joining the fiscal unity. It has been proposed that after a fiscal unity has been formed, the equity may, for the purposes of applying the equity/debt ratio, be increased with the goodwill gap for a period of 10 years. To this end, the goodwill gap will be decreased on a pro rata basis annually.

The Deputy Minister indicated that the measure does not apply to acquisitions made before January 1, 2007. It may be questioned whether an acquisition debt incurred before 2007, but refinanced in or after 2007, will also fall outside the measure. The Deputy Minister confirmed that the acquisition holding measure will be included in a bill to be presented on Budget Day in September 2011. This bill is expected to come into effect on January 1, 2012.

Impact analysis
KPMG Meijburg & Co performed a study showing that the rules will impact companies which are according to market standards not excessively financed, whereas the Deputy Minister claims that only 'excessive' leverage will be impacted. In order to give an indication of the impact of the proposed legislation on your company, KPMG Meijburg & Co has developed an Interest Impact Tool. The tool can be found on our website.

Harold Kluijtmans
KPMG Meijburg & Co Eindhoven
+31 40 250 2460
kluijtmans.harold@kpmg.nl