The Dutch rules for hybrid loans (or rather: hybrid financial instruments) have changed several times in the past decade, inter alia by way of the removal from tax law of a special anti-abuse article which dealt with this subject. However, the issue is still rather complex, as simplifications in the text of a law do not necessarily lead to real simplifications in practice. The sheer size of most intra-group financing transactions and the usual subordination clauses in intra-group loans to make them qualify as capital for statutory accounting purposes, usually lead to a situation whereby tax payers ”must” obtain advance clearance from the tax authorities whether or not the interest paid on such loans is tax deductible for the Dutch subsidiaries of the group.
The Dutch hybrid financial instruments concept, like the informal capital concept discussed elsewhere in this section, is therefore, today, based on Supreme Court case law of several decades ago. The Dutch Supreme Court decided that in some cases loan agreements concluded between related parties may well constitute a hidden form of capital contribution and must, for tax purposes, not be seen as loans at all. This opens up all kinds of ”mismatch” threats and opportunities as other countries use different approaches to determine whether a loan which is a loan in civil law or common law sense, is also a loan for tax purposes. The result is either double taxation (interest paid non-deductible; interest received taxable) or non-taxation (interest paid deductible, interest received non-taxable).
A hybrid financial instrument may arise of its own accord, without tax input, due to the Dutch Supreme Court views. Regular intercompany loans which often show a combination of subordination elements or a long fixed term or profit dependent interest, risk to be reclassified under Dutch tax law as hidden capital contributions (so the interest becomes a dividend which, if paid by a Dutch entity in the group, is not tax deductible [even if the receiving entity has to pay tax] and may be subject to dividend withholding tax). Obviously, in the mirror situation, one could end up with interest which is tax deductible abroad but non-taxable in the Netherlands due to the participation exemption which also exempts hidden dividends and hidden capital gains.
Over the years we have assisted clients in avoiding the double tax threat and have helped them detect the non-taxation opportunities where possible. The most recent one can even be described as a Dutch ”notional interest deduction”. This tax opportunity is adressed elsewehere on this website in more detail.
Hybrid arrangements (be they loans or legal entities) have recently caught the attention of the OECD and are an important paragraph in the BEPS report, published by the OECD in mid-July 2013. 2016 will be a transition year in which the tax authorities of the countries participting in or supporting the BEPS programme – some 90 at this point in time (January 2016) – will investigate how to reduce or even ban the perceived abuse of hybrid loans and hybrid leal entities by multinationals. BEPS, which contains 15 items, will result in a ”package deal” so nothing will get decided upon until everything gets decided upon, in late 2015. Separate from the OECD efforts, the European Commission has in the mean time adopted a change to the EU Interest and Royalty Directive, whereby interest from a hybrid instrument should always be taxable in the EU country of the recipient if it is tax deductible in its EU country of origin. This new rule, which is already heavily debated amongst tax professionals, will see the light of day on January 1, 2016. Many existing hybrid loans will therefore have to be re-arranged, or even cancelled, before the new rule takes effect. We shall be glad to assist.