Financing acquisitions and Dutch tax rules

Interest deduction limitations

In general, interest expenses are tax deductible. However, Dutch tax law includes some anti-avoidance rules such as an interest deduction limitation.

Interest deduction limitation for affiliated companies

This interest deduction limitation applies if:

1. a Dutch company borrows money from an affiliated company; and
2. the loan is related to certain legal acts. One of the legal acts by which the interest deduction limitation is triggered is the acquisition of at least one-third of the shares of a company.

If these requirements are met, the interest is not tax deductible. However, there is a counterevidence provision, which would make the interest tax deductible. This provision requires either proof of valid business arguments, or a fair taxation of the interest received by the lender.

Earnings stripping provision

The earnings stripping provision is a general interest deduction limitation. For this application, the reason for borrowing money and the relation to the lender are irrelevant. The earnings stripping provision limits the deductibility of the net interest expense to 30 percent of the EBITDA or EUR 1 million (whichever is highest of the two). The net interest expense that exceeds that amount is not tax deductible (however, the net interest expense which is not tax deductible in a tax year may be used in following tax years).

Dutch acquisition companies and consolidated tax return

In some acquisition structures, a Dutch acquisition company is established and borrows money (intragroup or third party) for the purpose of the acquisition. This Dutch acquisition company can file a consolidated tax return with the acquired company (if the holding is greater than 95 percent of the shares), and the interest expense on the combined result is tax deductible (if no interest deduction limitation applies).

Acquisition costs and participation exemption

According the Dutch participation exemption (corporate income tax), results of subsidiaries are tax exempt, and acquisition costs are not tax deductible. For VAT purposes the input VAT on the purchase costs may be not tax deductible in the VAT return.

Conclusion

In this article, we have identified a few points of attention when financing acquisitions. The tax rules are extensive and there is a lot of case law which should be considered as well. Therefore, it is recommended that you engage a Dutch tax advisor when setting up an acquisition structure.

Published: M & A Newsletter, No. 03 Autumn 2022 l Photo: Ron van der Stappen - stock.adobe.com