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Limitations in deductions for acquisition holdings and foreign branches


During discussions in Dutch Parliament concerning the tax measures for 2010, the Secretary of Finance, mr. J.C. de Jager, has indicated to express his position with respect to possible changes in the Dutch corporate income tax legislation before December 6, 2009. Below a summary of the possible measures is described.

Limitation in deductions for acquisition holdings
A serious problem are acquisitions of Dutch enterprises by (foreign) investors, whereby the acquisition is financed with debt (group loans and third party loans) of which the interest is deducted from the taxable income of the acquired enterprise.
Profitable companies are damaged by a severe amount of liabilities. This has a serious influence on corporate income tax revenues as well as it influences competition between acquired companies and companies that stand alone.
The Secretary of Finance expresses the view to introduce a limitation in deductions for acquisition holdings.
The proposals will seek to deny excessive interest deductions whereas realistic financing situations will still be acceptable.

Limitations in deductions for foreign branch losses
An aspect that recently occurred, concerns the possibility for multinational enterprises to deduct foreign branch losses from Dutch taxable profits. These losses are recovered in case of future branch profits. Although in principle it concerns a timing difference, the recoverage of branch losses can be postponed for a very long period of time, e.g. by converting the foreign branch into a subsidiary. Moreover the question arises whether it is realistic that foreign losses can be deducted from Dutch source income.
The Secretary of Finance considers to create a more equal treatment for branches and participations.
That would imply that foreign branch losses, equal to the situation of foreign profits of subsidiaries, are not considered for Dutch corporate income tax purposes. In such case the Secretary of Finance expresses the view to skip the subject to taxation requirement for non passive branches.

Deduction of interest on participation loans and earnings stripping
The Secretary of Finance is not considering to introduce limitations in these areas.

Mandatory interest box
The Secretary of Finance expresses the view to introduce the mandatory interest box only in case this does not influence negatively the foreign investment climate in The Netherlands. For the time being he has doubts whether this is possible.
The mandatory interest box means that both group interest income as well as group interest deductions take place at a special effective tax rate of 5%.