Edward Hendrickx & Roel Jansen
by Edward Hendrickx & Roel Jansen
If a company acquires the shares of another company, it is important to consider the tax consequences. For example, borrowing money (for the purpose of the acquisition) may lead to interest deduction limitations. It is also possible that the acquisition costs are not deductible. We will elaborate on these rules on a high level basis below. In this article, we assume that a Dutch tax resident company is the acquiring party. Also, we assume that the financing takes place with arms-length conditions.
Interest deduction limitations
In general, interest expenses are tax deductible. However, Dutch tax law includes some anti-avoidance rules such as an interest deduction limitation.
Interest deduction limitation for affiliated companies
This interest deduction limitation applies if:
If these requirements are met, the interest is not tax deductible. However, there is a counterevidence provision, which would make the interest tax deductible. This provision requires either proof of valid business arguments, or a fair taxation of the interest received by the lender.
Earnings stripping provision
The earnings stripping provision is a general interest deduction limitation. For this application, the reason for borrowing money and the relation to the lender are irrelevant. The earnings stripping provision limits the deductibility of the net interest expense to 30 percent of the EBITDA or EUR 1 million (whichever is highest of the two). The net interest expense that exceeds that amount is not tax deductible (however, the net interest expense which is not tax deductible in a tax year may be used in following tax years).
Dutch acquisition companies and consolidated tax return
In some acquisition structures, a Dutch acquisition company is established and borrows money (intragroup or third party) for the purpose of the acquisition. This Dutch acquisition company can file a consolidated tax return with the acquired company (if the holding is greater than 95 percent of the shares), and the interest expense on the combined result is tax deductible (if no interest deduction limitation applies).
Acquisition costs and participation exemption
According the Dutch participation exemption (corporate income tax), results of subsidiaries are tax exempt, and acquisition costs are not tax deductible. For VAT purposes the input VAT on the purchase costs may be not tax deductible in the VAT return.
Conclusion
In this article, we have identified a few points of attention when financing acquisitions. The tax rules are extensive and there is a lot of case law which should be considered as well. Therefore, it is recommended that you engage a Dutch tax advisor when setting up an acquisition structure.
Edward Hendrickx is EJP’s Founder, Partner & Tax Specialist. He specialised in international tax advice, mergers & acquisitions, and consultancy on entrepreneurship & for larger SME clients. Contact Edward.
Roel Jansen completed a master’s degree in fiscal economics at Tilburg University in 2021 and has been part of the EJP team since 2019. As an all-round tax specialist, he focuses on international tax and inheritance and gift tax. Contact Roel.
EJP Financial Astronauts are auditors, advisers, and challengers. Their team of 55 consists of auditors, accountants and international tax lawyers that have a wide range of expertise. Their main fields of expertise are Dutch corporate and personal income tax, international taxation, Dutch royalty, interest and dividend withholding tax, estate planning, and wage tax. They have an AFM licence to perform audits for the larger mid-sized companies.
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