(interest deduction limitation)
Section 15b of the 1969 Corporate Income Tax Act contains the so-called earnings stripping scheme (ESM). This scheme will be amended with effect from 1 January 2025[1].
The abolition of the €1,000,000 threshold described below will not go ahead. The percentage increase to 25% described below will be reduced to 24.5% in connection with this.
Current scheme (2024)
The main rule is that interest owed by a company is deductible from profits on which corporate income tax (Vpb) is due. The ESM implies that interest is wholly or partly non-deductible under certain conditions (interest deduction limitation).
The ESM currently applies to:
- All companies subject to corporation tax in the Netherlands,
as well as for;
- All foreign entities with Dutch real estate;
and implies that the interest non-deductible is to the extent that the balance of interest paid and received exceeds:
- 20% of EBITDA;
- with a minimum of €1,000,000.
Cut up
Because the first €1,000,000 of interest is always deductible, in practice (real estate) companies are split up. This allows multiple uses of this threshold, allowing a higher amount of interest to be deducted from profits.
Scheme effective from 1 January 2025
The following amendments to the ESM are proposed:
- Increasing the interest deduction rate from 20% to 25% of EBITDA;
- Anti-fragmentation measure for real estate companies.
Increase percentage
The increase in the interest deduction rate applies to all companies and allows for a somewhat wider deduction of interest.
Anti-fragmentation measure
Under the proposed anti-fragmentation measure, the €1,000,000 threshold will not apply in respect of property companies.
Perhaps needless to say, the €1,000,000 threshold for companies other than real estate companies does continue to apply as normal.
Real estate companies
These are companies whose adjusted assets (assets):
- for at least 50% of the year;
- for 70% or more consist of real estate,
- that in law or in fact directly or indirectly to third parties made available.
This assessment takes place per taxpayer. For taxpayers that are part of a fiscal unit, the assessment is made at the level of the fiscal unit.
Adjusted assets
For the purpose of testing against the 70% criterion, only the company's assets are considered. Adjusted assets are all assets except:
- participations to which the participation exemption applies;
- receivables from related entities or natural persons;
- property on the benefits of which the property exemption applies.
Third parties
Third parties are other than entities or natural persons related to the taxpayer.
Connected body[2]:
- an entity in which taxpayer holds at least 1/3e interest;
- and body that is at least 1/3e interest in taxpayer;
- a body in which a third party holds at least 1/3e interest, while this third party also has a 1/3e interest in taxpayer.
Connected person: a natural person who is at least 1/3e has an interest in taxpayer or an affiliated entity.
Effective date
The proposed measures are intended to take effect from financial years beginning on or after 1 January 2025.
Adjustment proposals
The Register of Tax Advisers (RB) has made proposals to adjust the scheme to be introduced in such a way that regular SMEs are (almost) not affected.
The RB's proposals are:
- Lower threshold not to €0, but to €100,000;
- for the concept of affiliated entity/person, an interest of 1/3e, but from 5% handle.
The RT made these proposals even before the bill was published. It is not clear on what grounds the RB's proposals were not incorporated in the bill. After the submission of the bill, renewed calls have been made to ensure that “ordinary” SMEs are not affected by the anti-fraud measure.
Action
Given the stage the amendment proposal is at, it would not be wise to take action(s) now with the aim of limiting interest to the amount that will presumably still be deductible after the amendment, but should await the discussion of the proposals in the House of Representatives. Perhaps politics will take the edge off after all.
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.
[1] This is part of the Tax Plan 2025 bill, which is pending before the House of Representatives.
[2] For the definition of related person/body, please refer to Section 10a of the 1969 Corporate Income Tax Act.