If you invest in the expansion of your business or acquire a new company, this gives rise to the question: how can you finance this?
Do you use your company’s capital?
Borrow money from an external financier?
Or do you provide an internal (group) loan?
What about interest deduction restrictions?
And the deductibility of costs of sale or acquisition?
Our experts discuss the different options and tax-related aspects of acquiring another company and (international) growth.
Using your own capital
If there are sufficient funds available within your company, you can use this capital to finance your plans. This might involve contributing capital into a Dutch subsidiary, for example. The paid amount is then added to the subsidiary’s equity capital. In principle, the payment itself has no direct Dutch tax consequences. Generally, repayment of capital is not taxed, although it may be necessary to take intermediary steps here.
External loan
You can finance an acquisition or investment using a loan provided by an external financier. Our advisors are happy to help you find a suitable party. The applicable terms for a third-party loan will usually be at arm’s length, but please note: if favourable terms are applied as a result of a guarantee by another group entity, this can have (tax) implications.
Internal (group) loan
If as a (foreign) parent company you provide a loan to an affiliated party, such as another group company in the Netherlands, you need to pay attention to the terms and conditions of the loan. This must be an arm’s length loan. Shortly put, the terms and conditions must be in line with market practices. In the Netherlands, terms and conditions that are not at arm’s length need to be adjusted for tax purposes. This might mean adjusting the interest charged to a (higher) commercial rate or decreasing the deduction of interest charges for tax purposes. Especially in international situations, this can lead to a mismatch, for example if the Dutch Tax Authorities reduce the interest deductible for tax purposes but that reduction does not result in a lower income item abroad.
Please note: some loans may qualify as capital for tax purposes. This is the case if the terms and conditions of the loan are such that it is in fact comparable to capital, for instance a subordinated loan with a term of more than 50 years on which the interest is linked to profits. In cases such as these, the interest is not tax-deductible.
Interest deduction restrictions
In addition to arm’s length adjustments, the Netherlands has a number of specific interest deduction restrictions. These rules mean that the interest deduction of the Dutch entity may be limited, even in those cases in which the terms and conditions are at arm’s length. For example, there may be an interest deduction restriction if the loan is linked to a dividend distribution, capital contribution or the acquisition of, or increased stake in, a participation.
Interest is also not eligible for deduction if the balance of the interest is higher than €1,000,000 a year and exceeds 20% of the EBITDA. Interest that is not deductible based on this latter rule (the so-called ‘earningsstripping measure’) can be deferred to subsequent years.
In 2021, the Netherlands introduced a conditional source tax on interest and royalty payments to group companies that applies, for example, to payments to low-tax countries or in the case of tax abuse. A similar rule applies to dividends.
Deductibility of acquisition costs
In the process of acquiring or selling a company, you often incur a variety of costs. When purchasing or selling a participation (i.e. a company in which you hold a direct or indirect 5% interest), the attributable expenses may not be deducted from the taxable Dutch profits at the level of the buyer or vendor. The deduction restriction may therefore apply when a foreign shareholder buys a participation through a (new) Dutch holding company. All expenses relating to (and directly contributing to) the purchase or sale of a participation, including internal expenses, are subject to deduction restrictions under Dutch corporate income tax law. This might include notary fees, legal fees and certain due diligence expenses. Expenses relating to financing are deductible, however.
A deduction restriction may also apply to the VAT on acquisition costs.
However, acquisitions may involve expense items for which it is not always immediately clear whether these costs are related to the acquisition. For example, it is relevant to determine whether a due diligence audit is conducted for the purpose of obtaining the financing or ‘only’ in the interest of researching the potential purchase of a participation.
Deductions on expenses are only restricted if the transaction was successful. In some cases, deductions on previously incurred expenses may still be restricted, namely if these expenses would also have been incurred during a subsequent successful transaction. As the burden of proof lies with you as taxpayer, it is important to keep accurate records of the expenses incurred during the transaction. Your advisor can help you to establish the deductibility of these expenses.
Financing acquisitions or growth: be alert to the tax implications
A number of aspects need to be considered when selecting a form of financing. Don’t forget to map both the short-term and long-term tax implications. Our experts would be happy to advise you on this matter.
Contact
If you would like to know more about financing options, interest deduction restrictions and acquisitions, don’t hesitate to contact us. We’re here to help!
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
