As part of global and European initiatives against tax avoidance, all EU member states are required to incorporate the EU Anti-Tax Avoidance Directive (ATAD) into domestic tax law no later than 1 January 2019. ATAD contains a number of rules in the areas of interest deduction, exit taxation, general anti-abuse, and controlled foreign companies. A formal legislative proposal for the incorporation of ATAD into Dutch tax law will be submitted to parliament on 18 September 2018 (Budget Day).
One of the announced measures is the so-called earnings stripping rule (the Earnings Stripping Rule), which limits the deduction of interest expenses for Dutch corporate income tax purposes in certain circumstances. Such deduction limitation could lead to a higher taxable amount. Based on the Earning Stripping Rule, Dutch companies would only be allowed to deduct “net borrowing costs” if and to the extent these net borrowing costs would not exceed the highest of:
(i) 30 percent of the company’s taxable earnings before interest, taxes, depreciation, and amortization (EBITDA), and
(ii) EUR 1 million
Net borrowing costs are equal to the company’s annual interest expenses (including any costs related to the loan and currency exchange results), less interest income. As the Netherlands aims to have equal treatment of both equity and debt, it was decided to take a stricter approach than that prescribed by ATAD. Consequently, the Dutch government expressed, inter alia, the intention that there will be no grandfathering for existing loans and that the new legislation will not include a group escape rule.
The flip side is that some of the existing interest deductibility limitation rules may be abolished together with the introduction of the Earnings Stripping Rule. More details will follow in another blog as soon as the legislative proposal has been submitted.