Ministry of Finance Releases Research Paper on More Equal Tax Treatment of Debt and Equity – Taxation
Netherlands: Department of Finance Releases Research Paper on More Equal Tax Treatment of Debt and Equity
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On September 13, 2021, the Secretary of State for Finance sent the House of Representatives a research paper on a more equal tax treatment of equity and debt.
The study concludes that adjustments to the tax treatment of equity and / or debt are preferably made in an international context, for example via the so-called DEBRA initiative recently communicated by the European Commission. In case of unilateral measures, an equity allowance is not desirable, but suggestions are made to tighten the profit stripping rules in combination with a reduction in the overall corporate tax rate. It is currently unclear whether the Netherlands are considering changing the earnings stripping rules. Next week’s Budget Day may shed more light on this.
Research on reducing corporate debt bias
As part of the 2021 budget plans, it was announced to prepare a study on a more equal tax treatment of debt and equity on a neutral budget basis (see also our Tax Flash). Like many other tax systems, Dutch corporation tax law in principle allows the deduction of interest costs as opposed to dividend distributions. Therefore, debt financing rather than equity financing is generally more profitable, which leads to relatively more debt financing. According to various studies cited in the aforementioned research paper, this so-called corporate debt bias is not desirable from a macroeconomic point of view and can lead to more instability, both for companies themselves. same as for the financial sector.
By analyzing the different possibilities of achieving a more equal treatment of debt and equity, the study mainly focuses on either (i) an incentive for equity through a progressive deduction on equity in the corporate tax purposes, or (ii) a debt disincentive by tightening the profit stripping measure associated with a reduction in the overall corporate tax rate.
Additional allocation on equity
An additional provision on equity is based on the increase in equity. The study indicates that the introduction of a progressive unilateral capital allowance will potentially provide new opportunities for tax avoidance. In addition, such a unilateral allocation on equity must take into account EU law (eg application of an autonomous entity rather than at the level of a fiscal unit). The study concludes that the unilateral introduction of a progressive deduction on equity is not desirable. According to the study, it is preferable to introduce such a measure at the international level. In this context, reference is made to the recent communication from the European Commission on “Corporate taxation for 21st Century “, including the consultation on a Debt Equity Bias Reduction Allowance proposal, which should lead to a proposal for a European directive in early 2022 (see our Tax Flash).
Strengthening of the stripping measure and reduction of the corporate tax rate
In the Netherlands, profit stripping rules limit the deduction of interest, as the interest balance exceeds the higher of the threshold of EUR 1 million or 30% of fiscal EBITDA. It is suggested to further limit profit stripping by lowering the threshold amount and / or lowering the deductible percentage of EBITDA. The latter was mentioned as an additional measure, albeit without consensus, by the Advisory Committee on Multinational Taxation (see also our Tax Flash) and is mentioned in several electoral programs of Dutch political parties. The study recognizes that an additional restriction on interest deductibility could have a negative impact on investments in the Netherlands and lead to economic double taxation. It is proposed to use the budget product for a generic reduction in the overall corporate tax rate in order to alleviate these drawbacks.
Based on this research paper, a unilateral equity provision is not expected. However, the European Commission intends to publish at the beginning of 2022 a proposal for a European directive which could contain a provision on equity. It remains to be seen whether the Netherlands in the meantime toughens the profit stripping measure. Next week’s Budget Day may create more clarity.
We will keep you posted on further developments. If you have any questions, please contact your trusted Loyens & Loeff advisor.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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