Proposal of law nr. 28 487 - 68

This proposal of law was adopted on 10 December 2002. It entered into force on 1 January 2003.

1. Background

This proposal of law has been submitted to the Dutch Second Chamber on 22 July 2002; after some changes, it has been accepted by that Chamber on 21 November and submitted to the First Chamber (which formally can not change it any more) on the same day. The relevant proposed changes concern:

• extension of the new laws on hybrid loans, primarily with regard to the participation exemption;
• extension of the so-called earn out rule in the participation exemption; and
• certain criteria with regard to venture capital and "green" funds (not dealt with here after).

2. Extension of the new laws on hybrid loans

The proposed legislation covers the following extensions:

• for purposes of article 10, second paragraph, letters a and b, a loan without a redemption date, is treated like a loan extended for a period of more than 10 years (i.e. potentially a profit sharing loan);
  
• although there is no actual proposed changes to the law regarding the measure of article 10, fourth paragraph, the government has now admitted that the application of this article may not always be allowed under treaty situations. Therefore, if a remuneration has been agreed on a loan from a related party which is not at arm's length, and for which no interest deduction is allowed, whilst the creditor in a treaty country is nonetheless taxed on an imputed arm's length basis, then a mutual agreement procedure could be started under which the interest deduction will be allowed if the treaty partners agree to qualify the underlying instrument as a loan for the debtor;
  
• article 10a prevents the deduction of interest under certain circumstances if:
  • equity is contributed to a company and the contribution remains outstanding or is borrowed back;
  • dividend is distributed or equity redeemed and the payment remains outstanding or is borrowed back;
  • a company is acquired from a related entity against debt; or
  • the Dutch tax base is deemed to be eroded through a combination of contributions of equity and loans.
It is proposed to include profit sharing loans under the list of instruments covered by Article 10a, first paragraph and second paragraph;

• Article 13, third paragraph, letter b allows income form hybrid loans to be exempt under the participation exemption under certain circumstances.
• The current anti-abuse provisions on the interplay between the participation exemption and hybrid loans in article 13b, sixth paragraph, are extended significantly and moved into a separate article 13bb.
  
• the limitation on interest deductions in case of leveraged takeovers under article 15, fourth paragraph is also extended to the acquisition of profit sharing certificates and hybrid loans by the proposed text. This coincides with the complete overhaul of the tax consolidated group regime, discussed in a separate memorandum;
  
• the Dividend Withholding Tax Act is also amended to further incorporate the hybrid loan legislation. The changes include the exemption, with retro active effect to 1 January 2002, from the duty to withhold dividend tax in case the participation exemption applies to the interest payments received (art. 4) or if the EC Parent/Subsidiary Directive is applicable (art. 4a) to dividends received from the debtor;
• finally, the grandfathering provided under the original hybrid loan legislation (exemption for loans existing before 1 January 2002) is limited to the extent that these loans will nonetheless be covered by the hybrid loan legislation if certain conditions of the loans are changed after that date.

3. Extension "Earn out rule"

The so-called earn out rule in the participation exemption is extended. Under the earn-out rule, a buyer and a seller of a participation may agree a sales price dependent on uncertain future events (e.g. future earnings). The law states that the fluctuations in value of the estimated outcome of such an agreement is also covered by the participation exemption. The proposed extensions cover the following situations:

• the fluctuations also fall under the participation exemption for the buyer, if it acquired, or extended, its participation through the acquisition of shares, even if the seller did not have a participation to which the participation exemption was applicable (and the fluctuations may therefore be taxable or deductible for the seller);
• the earn out rule also becomes applicable to redemptions of shares with an earn out clause;
• finally, the earn out rule is also applicable to transfers of part of a participation. According to the parliamentary history, this does not concern a change in the law, but only a clarification of the status quo.

Please see also, the extension of the earn out rule to tax consolidated groups under the proposed article 15ac, seventh paragraph, in the proposed Tax Plan 2003, Part II;

Texts of proposed changes of law
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