Introduction
29.983.000.000 EUR (5,2% of GDP), that is the number on which the Dutch government’s deficit landed in 2010.[1] In order to seal this gap, the Dutch government recently announced a plan containing a variety of structural measures to save up to € 18 billion between 2012 and 2015.[2]
Specific for the M&A field, one topic catches the attention: the restriction on the deductibility of interest on acquisition debt in a fiscal unity as from 1 January 2012.
What does it mean?
Under the current legislation, it is common practice that following an acquisition the leveraged acquiring company (holding) enters into a fiscal unity with the former Target, mostly an operational entity. The fiscal unity provides that income and cost from both companies can be offset against each other. Doing so, the tax base of this Dutch operational Target erodes due to a ‘debt push down’.
The new law wants to discourage such constructions. It imposes that the interest cost relating to the acquisition debt can only be offset against the taxable income of the acquiring (holding) company to the extent it does not exceed the taxable profit of this acquiring (holding) company. It will no longer be possible to offset the interest expenses of the acquisition debt against taxable profits of the acquired company. Hence, due to this exception on the Dutch fiscal unity a ‘debt push down’ will no longer be realised.
The amount that is not deductible is the lower of (i) the excess interest expense minus 1m EUR or (ii) the result of the formula: total acquisition interest expenses * (excess debt / total acquisition debt). The amount that could not been offset in a given year can be carried forward.
Exceptions
The interest cost of the acquisition debt remains deductible when the debt/equity ratio of the fiscal unity does not exceeds 2:1 or, as mentioned above, when the interest cost of the acquisition debt is less than 1million EUR.
Conclusion
In order to safeguard the tax deductibility of interest on acquisition debt, proper debt structuring is (and remains) key.
P.S. Other measures
It should be pointed out that the Dutch Budget 2012 also includes proposals in respect of (i) the Dutch tax exemption on non-Dutch permanent establishments, (ii) substantial interest rules (ii) and dividend withholding tax relating to Dutch Cooperatives.
Further information can be found on: http://www.pwc.nl/nl/prinsjesdag/index.jhtml
[1]http://statline.cbs.nl/StatWeb/publication/?VW=T&DM=SLNL&PA=81242NED&D1=a&D2=0,3,8,13,18,21-23&HD=110831-1314&HDR=G1&STB=T (CBS – cijfers overheidsboekhouding)
[2] http://www.prinsjesdag2011.nl/miljoenennota/belastingplan_2012 (Belastingplan 2012)
Credit restraints and a weaker operating environment have shifted attention in the sector toward smaller deals, minority stakes, divestitures and distressed targets. The three largest announcements during the first half of the year could be classified as “midmarket” and all related to minority purchases or purchases of remaining interest.
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