This content is from: Local Insights

Intragroup interest tax exemption

The Dutch Ministry of Finance announced on December 16 2008 that it will investigate the pros and cons of three potential drastic measures on interest taxation. One possibility is clearly preferred: tax exemption/no deductibility for interest income from and interest expenses to related parties, or the introduction of an obligatory group interest box (taxation/deduction against a low rate). This may be combined with a restriction on deduction of third party interest on loans related to the funding of acquisitions of subsidiaries and allowing participation exemption on group finance subsidiaries. The two (theoretical) alternatives that will be studied are: (i) no deductibility/tax exemption for all interest expenses and income or a system based on comprehensive business income taxation; and (ii) anti earning-stripping rules (similar to those in Germany and Italy). As said, those alternatives are not the preferred option. In particular, (ii) is not favoured at all. It will only be considered if other options turn out to be impossible. The Ministry of Finance has indicated that it will submit a bill to parliament in the first half of 2009.

The Ministry of Finance refers to a proposal made by three tax law professors in August 2008. Their proposal received a generally warm welcome from politicians, businesses and tax professionals. The proposal includes the preferred option of the Ministry of Finance, but also includes a reduction of the main corporate income tax rate, the abolishing of dividend withholding tax and the tax exemption of income and gains from liquid assets kept as a war chest.

Tax exemption for intragroup interest would put the Netherlands on top for group finance and treasury companies. Combined with the attractive Dutch participation exemption, flexible corporate law and good infrastructure, it will strengthen the position of the Netherlands as a good location for (European) headquarters.

Freek Snel and Sylvia Dikmans

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