Earnings-stripping rule - general
As per 1 January 2019, the earnings stripping regulation has been implemented in Dutch tax legislation. This regulation limits the amount of interest that can be deducted and works as follows:
The (negative) balance of all interest income and expenses (and comparable costs and income) can only be deducted to a total of a certain percentage of the EBITDA of the company in the relevant financial year. However, the first 1 million euro of the balance of interest income and interest expenses are always deductible.
Initially, the certain percentage of the EBITDA amounted to 30 percent. As of 2022, the respective percentage was set at the current percentage of 20 percent.
Interest deduction that is limited by the earnings stripping regulation can be carried forward indefinitely.
Fragmentation and anti-abuse legislation
In relation to the 2022 amendment (percentage from 30% to 20%), the legislator already indicated that they would monitor whether a tightening was needed. In relation to fragmentation behavior, it was stated that such legislation was likely to be complex.
The fragmentation that was addressed specifically related to real estate investors.
To avoid the applicability of the earnings-stripping rule, real estate investors assign real estate investments and the accompanying financing in separate entities (special purpose vehicles) as the earnings-stripping rule applies per separate taxpayer. As such, the threshold of 1 million euro is not met and all interest is deductible.
Spring note 2023
The Dutch government has announced a measure to avoid the earlier addressed fragmentation behavior by real estate investors.
The fragmentation behavior will be tackled by completely abolishing the EUR 1 million threshold in the earnings-stripping rule for entities that lease real estate to third parties. This would apply to domestic entities as well as foreign entities (through a Dutch permanent establishment). These specific taxpayers can only deduct the balance of all interest income and expenses to a total of a 20 percent of the EBITDA.
This measure will be included in the 2025 Tax Plan and will apply as of January 1, 2025.
What to do?
Clearly, the intention to come to an equal treatment of debt financing and equity financing is pushed through. It cannot be denied that the Netherlands’ attractiveness for real estate investors is decreasing.
At this stage, the following actions are recommended:
- Recalculate the real estate’s investment’s cash flow position and the exit strategy;
- Consider additional equity financing in relation to the above.
Please note that any follow-up would depend on the exact description of the contemplated amendment.