Potentially short window of time to benefit
As you may know, the Netherlands tax system holds transactional based anti-base erosion rules for loans. These rules are laid down in article 10a Dutch Corporate Income Tax Act (CITA) 1969. Pursuant to these rules, interest expenses on loans caught under this legislation ("tainted loans") are not deductible for CITA purposes (some escape provisions exist). The term “interest expenses” is deemed to include costs and currency exchange (F/X) results.
The tainted loans are related party loans that are used for:
- a dividend distribution or a repayment of capital to a related party;
- a capital contribution into a related party; or
- the acquisition or expansion of an interest in a related party.
The term results includes currency exchange (F/X) losses on a tainted loan. The question brought to the Dutch Supreme Court was whether currency exchange gains were also covered under the term results and thus exclusion of deductibility. The tax authorities claimed that while F/X losses on tainted loans were not deductible, F/X gains on such loans were fully taxable (basically, they emphasized that article 10a CITA regards a disallowance of deductions, and therefore only regards negative amounts). The taxpayer argued that even where article 10a CITA regards a disallowance of deductions, the provision refers to F/X results, and thus F/X results on a tainted loan should be excluded in its entirety from the Dutch taxable base. On February 24, 2012, the Dutch Supreme Court rendered the landmark decision that a currency exchange gain on a tainted loan should not be taxable.
Who does this benefit and what is my benefit?
If your structure includes a Dutch subsidiary that has a tainted loan, this decision may benefit you if the denomination of the loan differs from the denomination of the Dutch tax filing (most common — you file your Dutch tax return in euros and the loan is denominated in a different currency). With the volatility of the currency markets, likely an F/X result arises with respect to that loan.
This decision benefits three groups of Dutch taxpayers.
- Dutch taxpayers that have realized F/X gains on tainted loans in the past. Generally, while this case was pending, the Dutch tax authorities did not impose final tax assessments for taxable years that included these disputed F/X gains. So Dutch taxpayers that did take the F/X gain exclusion position can now reap the benefits.
- Dutch taxpayers that have not taken this filing position but have instead reported F/X gains of tainted loans as taxable income. If they have not received their final corporate income tax assessment for that particular year, they can file an amended income tax return for that respective year and still claim the exclusion of the F/X gain. If the final corporate income tax assessment for that particular year has been received, a window of only six weeks exists in which an appeal against that assessment can be filed.
- Dutch taxpayers that have a tainted loan with a “pregnant” F/X gain on it. Generally, F/X gains on long term loans are deferred until the loan is paid down. As a result, the F/X gain is not triggered during the term of the loan. Under this Supreme Court decision, this F/X gain can now be triggered tax free.
Why act now?
For category 1 and 2 taxpayers listed above, the benefit that the F/X gain on a tainted loan is not taxable can be claimed immediately. The Dutch taxpayers that have a tainted loan with a “pregnant” F/X gain on it can choose to wait until the loan is paid down. Nevertheless, we recommend acting now to voluntarily trigger the F/X gain immediately.
- This Supreme Court decision may create a budgetary deficit that the Dutch tax authorities have not considered. This may prompt the Dutch legislature to step in and amend the Dutch CITA — resulting in F/X results becoming taxable. This may happen quickly.
- Where F/X results are volatile, an F/X gain that is present now may no longer be present at the termination of the loan. It is better to realize an exempt gain while it exists rather than lose it later.