The interest deduction limitation in corporate income tax will change. The Cabinet proposed two far-reaching measures in the 2025 Tax Plan. For some companies this offers an easing, but certain companies with real estate let to third parties will be able to deduct much less interest from 1 January 2025 onward.
Our experts discuss the generic interest deduction restriction, the proposed changes and what this means for your company.
What is the generic interest deduction limitation?
If a business pays interest on a loan (for example, a loan from a bank or a debt to another company), it can usually deduct that interest from the profit as a cost. This may lead to a lower taxable amount, resulting in a lower corporate income tax liability. In this case, the interest expense will ‘hurt’ somewhat less from a business perspective, because the total tax burden is slightly lower.
But in some cases, only part of the interest is deductible, or deduction is not even allowed at all. Although there is an (operational) expense, the interest payment does not lead to a lower taxable profit as a result of a tax correction.
Corporate income tax applies a generic (or general) interest deduction limitation, the so-called earnings stripping measure (“ESM”). In principle, the ESM applies to all companies that are subject to corporate income tax in the Netherlands, including, for example, a foreign entity that owns Dutch real estate.
How does the earnings stripping measure work?
The current earnings stripping measure (2024) stipulates that interest is not deductible if the balance of interest due and received exceeds 20% of the profit and exceeds € 1 million. The other way round: the first million euros in interest is deductible, but after that the amount of deductible interest may not exceed 20% of the profit (more accurately: 20% of the fiscal EBITDA).
Please note: In addition to the generic interest deduction limitation, there are also specific schemes through which a limitation may apply. For example, if a loan has to be reclassified as capital for tax purposes. Moreover, the concepts of ‘loan’ and ‘interest’ must not be interpreted too strictly. If we look at the legal history and case law on this subject, certain comparable forms of financing also turn out to be subject to limitations.
Proposal for Budget Day 2024: expansion and limitation of the deduction threshold
Two new measures with regard to the ESM were discussed in the run-up to Budget Day 2024.
Firstly, a restriction has been proposed, the so-called anti-fragmentation measure, which specifically concerns companies with real estate that has been let to third parties. To make multiple use of the threshold of € 1 million, businesses can split up their activities across several companies. The Cabinet finds this undesirable, particularly for real estate companies. In the 2024 Spring Memorandum, it was announced that the threshold of € 1 million would not apply to companies with real estate let to third parties as of 1 January 2025. In short, this concerns companies whose assets (after adjustment) consist, for at least half of the year, mainly (70% or more) of immovable property made available to third parties. As a result of this change, splitting up the financing in connection with real estate let to third parties is no longer effective. This measure has now been further elaborated in the Budget Day plans.
Furthermore, an expansion has been announced. The percentage for the application of the ESM will change from 20% to 25% of the tax EBITDA. This therefore offers more room for deducting interest. In principle, this expansion applies to all companies, including companies with let real estate.
What does this mean for your business?
The increase from 20% to 25% will benefit some companies, leading to a lower tax assessment. In any case, this is in principle not a disadvantage. But be sure to check whether the proposed change might have other consequences. For example, don’t forget to adjust forecasts and financial estimates, and look into requesting an adjusted provisional corporate income tax assessment for 2025. Your advisor can help you identify these issues.
The abolition of the limitation threshold of € 1 million has more (negative) consequences for the companies affected by this. Depending on the circumstances, the result after taxes may be up to tens of thousands of euros lower. Of course, you will want to take this into account. And perhaps this new legislation will be a good reason to undertake further analysis of your company structure. Is it wise, for example, to combine split-up activities back into one company?
Proper preparation pays off
Both amendments have been included in the 2025 Tax Plan , slated to enter into force on 1 January 2025. The coming period will show whether and in what form the House of Representatives and Senate will approve it. However, if both proposals are successful, it is important that you assess the impact on your business.
Our experts would be happy to help you with this. From calculating the bottom-line consequences, to analysing alternatives and structural adjustments. Please contact us to discuss your situation, the consequences and the possibilities. This will help you stay in control of your business, even when legislation changes.
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.
