On April 23, proposed legislation was sent to the Dutch Parliament which includes measures of great importance for the Dutch business community. These measures, previously announced on January 29, 1996, include, amongst other items, a finance risk reserve for international groups.
Following the approval by Parliament, the bill became effective as from 1 January 1997.
This note provides for a general description of this new regime.
RISK-RESERVE FOR INTERNATIONALLY OPERATING COMPANIES
A Dutch resident entity or branch which is part of an international group may, upon request, form a risk-reserve for specific risks associated with its international operations. The risk-reserve is meant for risks relating to finance activities and the holding of foreign participations or branches. To qualify for the facility, it is not necessary for the finance activity to be the sole activity of the Dutch entity, nor is it necessary to incorporate an entity for that purpose. The finance activities can only be conducted from the Netherlands. Whether the group has other finance entities outside the Netherlands is not relevant.
To qualify for the facility, an entity must meet each of the following two tests: an activities-test and a countries-test.
The Activities-Test
The entity needs to perform finance activities for the benefit of the group. The term "finance activities" is broadly interpreted and includes, for example, the financing of related entities (irrespective of whether or not they qualify for the participation exemption), including finance and operational leases and the exploitation of acquired or self-developed intellectual property (royalties etc.).
The Countries-Test
To qualify for the facility, the entity has to perform the finance activities on behalf of group companies which are established in at least four countries or on two continents. In addition, under the four-countries-test it is required that related entities in each of the countries contribute at least 5% of the taxable gross income of the Dutch entity. Under the two-continents-test, related entities in each of the continents are required to contribute at least 10% of the taxable gross income of the Dutch entity. Under this countries-test a limited income-pooling of countries or continents will be allowed.
In addition, the entity may also (but is not required to) finance Dutch related entities, although within certain ratios. For example, not more than 10% of the funds used for the finance activities may be deployed in the Netherlands. Finance income realised from any excess of funds deployed in the Netherlands will not qualify for the risk reserve.
The Addition To The Reserve
Annually, maximally 80% of the taxable profits from the finance activities can be deducted from the taxable profit and added to the special risk reserve. These profits include income/capital gains from active foreign subsidiaries which do not qualify for the participation exemption because they are not subject to income tax in their country of residence, and the income from short term investments which are made in connection with possible future acquisitions (the "acquisition fund"). Income/capital gains from passive foreign subsidiaries which do not qualify for the participation exemption, such as the passive finance companies mentioned in paragraph B2, cannot be added to the reserve and are, therefore, fully taxable.
Deductions smaller than 80% are also possible at the discretion of the taxpayer. The taxable profits (as referred to above) from the finance activities do not include profits which are exempt by virtue of the participation exemption or profits which are exempt under double taxation relief rules. Currency profits on loans can be 100% deducted from the taxable profit and added to the reserve.
The maximum annual addition to the reserve should also not exceed 80% of the total taxable income of the Dutch entity (ie: including losses from other activities). The size of the reserve is otherwise unlimited.
The Release Of The Reserve
The reserve can be released in a number of ways:
a. By means of a taxable release
Tax deductible losses related to risks for which the reserve is created (for example: write-downs of loans or liquidation losses), trigger a taxable release (at regular rates) of the reserve to the extent of these losses.
The reserve will also be released fully taxable if the entity fails to meet the tests mentioned above or is liquidated.
b. By means of a tax-free release
In a number of specific circumstances, the facility allows for a tax-free release of the reserve:
- The entity may release from the reserve 50% of the amount of the capital contributed to a foreign subsidiary or 50% of the price paid for a subsidiary. The amount of the release reduces the tax cost price of the subsidiary (relevant for the calculation of a liquidation loss).
- The (full) amount of a capital contribution to a related company which relates to the assumption of a liability by the group for a risk which has arisen in that company and cannot be borne by that company itself.
- The (full) acquisition cost of a subsidiary which, in the opinion of the Minister of Finance, involves extraordinary risks, either on account of its activities or because of the place where these activities are performed.
c. By means of a voluntary release
Finally, the facility provides for a voluntary release whereby the full reserve is released on a straight line basis over a five year period at a special tax rate of 10%. During the release period the Dutch financing entity should still meet the tests mentioned above and all other conditions (if any) imposed by the tax authorities when starting the reserve.
Further information can be obtained from Mr P.J. te Boekhorst
KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247.
Keywords: Netherlands / Europe / European Union / KPMG Meijburg & Co / Dividends / Interest / Royalties / Participations / Corporate finance / Finance risk reserve
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.
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