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DEBT RESTRUCTURINGS
GENERAL
1. Does debt have a specific meaning for tax purposes?
There is no specific definition of debt for Dutch tax purposes. The Dutch civil law form is in principle decisive in this regard. There are three limitative exceptions where the loan is to be regarded as equity for Dutch tax purposes, being (i) the sham loan, (ii) the bottomless pit loan, and (iii) the profit participating loan. If one of these three exceptions does not apply, the loan is considered debt for Dutch tax purposes. Unless specifically mentioned otherwise, the remainder of this commentary assumes that the debt is also treated as debt for Dutch corporate income tax purposes.
Next to the recharacterization of certain debt as equity for Dutch tax purposes, it must be considered whether a loan is considered businesslike or non-businesslike. A loan is considered non-businesslike, if an independent third party would not, under the same conditions and circumstances, have provided the loan and it is not possible to make the loan businesslike with an adjusted fixed interest rate (which in fact is not profit sharing). Non-businesslike loans are treated as debt for Dutch corporate income tax purposes. However, specific rules apply inter alia to interest deductibility, write offs and impairments.
2. Do derivatives have a specific meaning for tax purposes?
Derivatives do not have a specific meaning for Dutch tax purposes. The Dutch corporate income tax treatment of derivatives should be determined on a case-by-case basis, considering the classification for Dutch tax purposes on the basis of the set of rules as set out hereinabove.
3. Generally, are intra-group debts treated differently to external debt for tax purposes?
In principle, intra-group debts and external debts are both treated the same. However, when dealing with intra-group debts, some aspects are different and require additional attention (e.g., the arm's length principle if it concerns intra-group debt, specific interest deduction limitation rules and the conditional withholding tax on intragroup interest payments).
4. Does it make a difference if debt is owed by a partnership or other pass through entity in distress to third parties versus to its partners?
There are no specific rules (and so no essential differences by nature) if debt is owed by a partnership or other pass-through entity in distress to either third parties or to partners under Dutch tax law. Dependent on the structure and relevant facts and circumstances (including which of the parties has a Dutch taxable nexus), there may be certain attention points from a Dutch tax law perspective and hence tax consequences may be different.
DEBT IMPAIRMENT
1. What are the key tax considerations on a debt impairment for the creditor?
For Dutch tax purposes, receivables are in principle valued at nominal value at the level of the creditor. An impairment to fair market value can for Dutch tax purposes be taken into account in three cases: (i) if the position of debtor has worsened (based on a subjective and reasonable judgment of the creditor considering the relevant information available at that time); (ii) in case of a foreign currency receivable, if the relevant foreign exchange rate has dropped; or (iii) in case of a fixed interest rate, if the market interest rate has increased and it is the creditor's intention not to retain the receivable until maturity date.
No deductible tax loss as a result of a foreign currency loss or increased market interest can be taken into account if there is a hedged position. In case of non-businesslike loans, no deductible tax loss can be taken into account (except for any liquidation losses). There are specific anti abuse rules in case impaired debt is disposed of or converted into equity if the impairment was taken as a deduction for Dutch corporate income tax purposes.
2. What are the key tax considerations on a debt impairment for the debtor?
The impairment of debt by the creditor should have no adverse Dutch corporate income tax consequences for a debtor. In case of procured services on which VAT has been charged by a supplier, debt impairment may result in an obligation for the debtor to repay any amounts of VAT deducted by the debtor to the tax authorities.
DEBT AMENDMENT, REFINANCING AND NOVATION
1. What are the key tax considerations on a debt amendment?
Where an amendment to an existing debt results in a new debt for commercial accounting purposes this could trigger taxable results. If the debt amendment results in the formal or economic waiver of debt, this may give rise to taxable debt waiver income at the level of the debtor. This may be different if the amendment only changes terms in a way that is more favourable for the borrower with the result that there is no formal or economic waiver of the existing debt. In addition, Dutch debtors may need to consider whether the amendment affects interest deductibility under the Dutch tax interest deduction limitation rules.
2. Does the deferral of any payments of interest or repayments of principal trigger tax consequences?
For Dutch corporate income tax purposes, interest income and expenses are generally accounted for on an accrual (rather than cash paid) basis. Therefore, the deferral of any interest accrual may have an impact on the timing of recognition of any interest income and expense.
For interest payments and expenses which are subject to the Dutch conditional withholding tax (pursuant to the Dutch Withholding Tax Act 2021), accrued interest that has not been paid during the calendar year will be deemed to have been paid on 31 December of that year. If subsequently an actual payment is made, any interest accrued in a previous year can be deducted from the payment to the extent it is made plausible that the accrued interest has already been taken into account for purposes of this withholding tax.
Unless the deferral has the effect of giving rise to accounting adjustments (see above), the deferral of any repayment of principal should in principle not trigger adverse Dutch corporate income tax consequences for the debtor.
Assuming the debt was not discounted and has not been impaired by the creditor, repayment of principal should not give rise to any adverse Dutch corporate income tax consequences for a Dutch debtor or creditor. Where a debt was issued at a discount or has been impaired by the creditor, any repayment of the principal amount which exceeds the impaired amount of debt recorded in the accounts of the creditor or which constitutes repayment of the discount element, would be taxable in the hands of the creditor for Dutch tax purposes.
The granting of credit does not attract VAT. As such, no VAT is levied on (deferred) interest and repayments of principal amounts.
3. What are the key tax considerations on a debt refinancing?
Similar to a debt amendment, if a debt refinancing results in a formal or economic waiver of debt, this may give rise to taxable debt waiver income at the level of the debtor. Moreover, Dutch debtors may need to consider (i) the applicability of the conditional withholding tax on interest payments, and (ii) interest deductibility.
i. Conditional withholding tax: The Netherlands has a conditional withholding tax on intragroup interest payments. The withholding tax is levied on interest payments to jurisdictions with a statutory profit tax rate of less than 9% or to jurisdictions that are EU blacklisted, to certain hybrid entities and in abusive situations.
ii. Interest deductibility: Interest is generally a deductible expense for Dutch corporate income tax purposes on an accruals basis. However, there are a number of detailed rules which can apply to restrict deductibility of interest for Dutch corporate income tax purposes. This includes interest deduction limitations on: long term low-yield related party loans, the general earnings stripping rule, 'abusive' situations.
When debt is refinanced in intra-group situations the arm's length character of the debt refinancing (and the terms and conditions of the debt itself) should be taken into account.
4. Does rolling up interest or satisfying interest through issuing "payment in kind" notes give rise to any tax consequences?
For Dutch corporate income tax purposes, interest income and expenses are generally accounted for on an accrual (rather than cash paid) basis. Therefore, the rolling up of interest and satisfying interest through issuing "payment in kind" notes as such should not have adverse Dutch corporate tax consequences for either a Dutch creditor or a Dutch debtor.
Based on commentary to the OECD Model Convention, the term "paid" has a very wide meaning, since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom. The same holds true for the Netherlands, where interest is considered paid at the moment at which the interest is paid or offset, made available, becomes interest-bearing or has become due and payable. As a result of the roll-up, addition to the loan principal and becoming interest bearing, the interest is therefore considered to have been paid.
From a VAT perspective it is noted that the payment in kind can be subject to VAT. This depends on the nature of the payment in kind.
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