State Aid investigation into Dutch Group Finance Company Regime finalised

On 17 February, the European Commission decided that the Dutch Group Finance Company Regime (hereafter "GFC regime"), together with the Belgium Co-ordination Center Regime (hereafter "BCC regime"), constitute (forbidden) state aid because the GFC regime grants tax breaks which are not allowed under EU state aid regulations. However, the beneficiaries of the GFC regime are not required to pay back the aid granted to them. The Commission believes that the similarity to the BCC regime (which was not consider to constitute State aid initially) gave the beneficiaries reason to believe that the tax advantages did not fall foul of State aid rules. The Commission has ordered the Netherlands to close the scheme to new entrants immediately and to bring the tax advantages to a definitive end by 31 December 2010, at the latest. According to the press release, this means that if a licence for the GFC regime was granted on 1 January 1997 it must definitely expire on 31 December 2007, while no licence can be exploited beyond 2010. A similar phase out period is agreed for the BCC regime.

See our website for the original EU press release

Limited relief on interest deduction Exchangeables

On 26 February the State Secretary of Finance issued a decree allowing for interest deductions of certain exchangeables. Exchangeables is the word used for convertible loans (bonds, notes, etc.), which are not convertible into shares of the issuer, but into shares in other entities.

As of 1 January 2001, Dutch law (Art. 10b CIT) dictates that if a taxpayer concludes a loan of which part of the compensation consists of (the right to attain) shares in the taxpayer or a related entity, then only the agreed periodic interest is deductible. The legislation was originally introduced without grandfathering relief for loans already outstanding at the time; a part of this retro-active effect is now taken away by determining that the legislation is not applicable to certain loans concluded before 25 January 2000. The loans must be provided for at least 5 year; the creditors may not primarily consist of related parties and the compensation may not consist of shares in the issuer, but of shares in a related party. The fact that the compensation consist of shares in a related party and not in the issuer may not be primarily motivated by tax avoidance reasons. Finally, the decree states that relief may also be available in other cases, e.g. for loans extended between 25 January 2000 and 31 December 2000, provided there is no arbitrage. Little is said further about the conditions under which the extended relief will be possible.

See our website for more details on the decree.

Q & A decree on Tax Consolidated Group Regime

On 11 February a Q & A decree regarding the Tax Consolidated Group regime was published. Although the decree is primarily dealing with the old tax group regime (which is grandfathered for 2 years), many of the answers given also have implications for the new regime which entered into force on 1 January 2003, since large parts of the old regime have been incorporated into the new one. The bulk of the questions deal with the anti abuse measure aimed at preventing tax payers from turning taxable hidden reserves in to untaxed sale proceeds of shares in consolidated subsidiaries. (e.g. building has hidden reserves, Parent incorporates Sub, forms a consolidated group, transfers the building to Sub and sells the shares in Sub; the anti abuse measure now requires Sub to mark the building to market before Sub is deconsolidated). See our website for a translation of the decree.
These translations have also been integrated into the downloadable excerpt of our site exclusively dealing with the tax consolidated group regime.

Other points of interest

• On 13 December 2002 the High Court of Den Bosch determined that the Dutch permanent establishment of a Swiss AG must be allowed to form a tax consolidated group with its Dutch subsidiary. Until 1 January 2003 Dutch corporate tax law did not allow tax consolidated groups with foreign entities resident outside the Netherlands. However, had the AG been a Dutch BV, consolidation would have been possible since companies incorporated under Dutch were deemed to be resident in the Netherlands for tax consolidated group purposes. This constituted an unacceptable discrimination of the company's nationality under the Dutch/Swiss tax treaty.
• On 7 February, the Dutch Supreme Court demonstrated that the double taxation of companies within the Netherlands is a very real threat under anti abuse legislation introduced in 1997. A Dutch BV acquired a receivable on a Dutch group company. Although the case does not give the reason why, it does state that the interest due on the receivable was not deductible for the Dutch debtor due to the application of article 10a of the Dutch Corporate Income Tax Act. This limitation on the deduction did not prevent the taxation of the interest received by the Dutch BV. Although the double taxation of companies may be common in many jurisdictions, Dutchtax.net continues to disagree with the ferociousness with which governments fight the avoidance of taxation on the one hand, whilst knowingly enacting legislation leading to double taxation on the other. For more information on the limitation of interest deductions under Dutch law, see our separate memorandum.
• In decisions of 7 and 14 February the Dutch Supreme Court confirmed existing case law with regard to insurance companies stating that no roll over relief is available for profits realised on the disposal of shares or bonds. With regard to the shares held the Supreme Court also determined that the participation exemption does not apply, since the shares were not held because this was in line with the activities of the enterprise of the insurer (e.g. because the activities of the entities in which the shares were held were in the same branch of business as the activities of the shareholder), but the shares were exclusively held with the aim to achieve a return which does not exceed a normal return on investment. The fact that the insurer held the shares in connection with the coverage of its (potential) liabilities of its clients, merely formed a reason for the acquisition of the shares, but did not change the function of the shares. The criteria used by the Court in this case applies in determining whether a Dutch BV holds a foreign participation as a portfolio investment only.

Disclaimer

Please note that although care has been taken to present the facts given in this newsletter and our site, www.Dutchtax.net, as accurately as possible, neither of these sources should be relied upon for taking any action without prior consultation with a Dutch tax professional. For further information, see our disclaimer.