KPMG comments on Dutch debt-push-down structures.
This is contribution number 25 by KPMG Meijburg & Co regarding debt-push-down structures.
In September 1995, the Dutch Supreme Court issued the final verdict in two important cases regarding debt-push-down structures. Such structures are frequently used by companies (the Investor) to acquire foreign companies (Targets). Given the fact that most companies have some kind of debt: equity ratio, it is understandable that the same ratio is most likely used whilst expanding the existing business activities. It is equally understandable that the interest associated with debt for the new acquisition abroad, should (as much as possible) be used to offset the profits resulting from the newly acquired Target. Therefore an attempt is usually made to transfer the debt to the jurisdiction of the Target. This is generally known as "debt-push-down".
In the Netherlands this was accomplished by using the fiscal unity concept: i.e. the Investor would set up a thinly capitalized Dutch holding company (Holding Co). Holding Co would borrow funds at arm's length interest rates from a group finance company and use the funds and a relatively small share capital to acquire the Target. Target and Holding Co would apply for fiscal unity classification as a result of which the interest expense of Holding Co would offset the profits of Target. If the funds were borrowed from companies located in a tax haven the authorities would generally scrutinize the structure and attempt to deny the interest deduction using the general anti-avoidance provision know as "fraus legis".
In the two September 1995 cases Holding Co was interposed after Target had been acquired by the Investor. Notwithstanding the fact that in both cases the interest-recipient (Parent Co) was not located in a tax haven, no local income tax was actually due on the interest received. In the United Kingdom this was due to the availability of foreign tax credits and/or the working of the ACT regime and in Norway as a result of equal interest expenses on the external debt to finance the initial acquisition. The United Kingdom case has been referred back to the Lower Court, in order to establish whether the interest received by the Investor would normally be subject to a "reasonable" tax.
The following issues are still very much unclear:
- What position the authorities will take if the acquisition is not debt financed from the concern's overall perspective.
- What constitutes a "reasonable" tax at Investor's level.
- What will happen, if the transaction and structures are the result of an "acceptable" tax avoidance scheme abroad: will this have any relevance as to the application of the general Dutch anti-avoidance provision (fraus legis).
This message is most likely to be relevant for foreign Multinational Enterprises (MNE's) considering acquiring Dutch companies or having Dutch companies.
Further information can be obtained from mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247
Keywords: Netherlands / Dutch / Europe / EC / EU / European Union / KPMG Meijburg & Co/inward investments / MNE / fringe benefits / debt-push-down / mergers & acquisitions
Note: The content of this contribution is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
