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PRINT THIS PAGE Modernisation of the Dutch Corporate Tax Act20/03/2007. Source: PricewaterhouseCoopers.
In a cash-flow driven M&A market, tax is more and more considered a key value driver. The 2007 Dutch (corporate income) tax reform recognizes the importance of tax. Its objective is to further improve the Dutch economy and investment climate by introducing tax measures that should attract foreign investors thereby providing a competitive advantage. This article highlights the proposed changes relevant to the Dutch M&A market. In a cash-flow driven M&A market, tax is more and more considered a key value driver. The 2007 Dutch (corporate income) tax reform recognizes the importance of tax. Its objective is to further improve the Dutch economy and investment climate by introducing tax measures that should attract foreign investors thereby providing a competitive advantage. This article highlights the proposed changes relevant to the Dutch M&A market.
In general, the 2007 tax reform should have a positive impact on the effective tax rate that will apply to the profits of Dutch target companies going forward, (mainly) because of the proposed reduction of the Dutch corporate statutory rate to 25.5%. This should be factored into the financial model that supports the economics of the contemplated transaction.
Another possible impact of the proposed 2007 tax reform involves the considerations in structuring a transaction, i.e. whether to acquire the shares or the assets of a Dutch target company. In general, a share acquisition is deemed most effective because of the Dutch participation exemption and the broad tax loss utilization rules. The different impact on the parties to the transaction may be assumed smaller as a result of the proposed changes to the depreciation rates of, for instance, goodwill (and real property) and the proposed time restrictions to the future utilization of tax losses.
The nine years limitation on tax loss carry forward may lead to a stronger preference of acquiring assets, in particular in distressed transactions, as assumed future trading forecasts may put greater pressure on methods to accelerate the use of such tax losses. However the minimum goodwill amortization period of ten years is likely to negatively influence the net present value of the tax amortization of goodwill and may be lower than or closer to the immediate tax on the capital gain. In share transactions, the proposed changes to the amortization periods of goodwill may be considered limited albeit that a deferred tax asset in relation to tax losses may have to be restated since tax losses can no longer be utilized indefinitely as from 2007.
In considering an appropriate acquisition structure for a Dutch target, the following proposed changes may be relevant to a buyer:
- streamlining of interest deduction rules;
- reduction of dividend withholding tax;
- introduction of a special rate in relation to inter-company financing and licensing arrangements;
- simplification of the Dutch participation exemption.
The anti-abuse rules, with respect to interest expenses on so-called related party debtwill be aligned in 2007. Interest expenses on related party debt should only be deductible if
- the loan and the underlying transaction are based predominantly on sound business considerations, or
- the interest received is effectively and sufficiently taxed, i.e. interest needs to be subject to an effective tax rate of at least 10% and may not be offset against prior year losses (socalled compensating tax charge exception).
The aforementioned rule will equally apply to internal reorganizations and to third party acquisitions, whereas until 2007 the anti-abuse rules in case of a third party acquisition was less strict (possible deferral of interest expenses instead of a denial). To provide some relief from this 'alignment', it is currently proposed to introduce a transitional rule for interest expenses that have been incurred until 2007 but were the tax deduction has been deferred based on the current rules. Mechanisms to allocate related party debt to outside the Dutch scope of any transaction will become even more important.
In a diversified investor-competitive environment, more emphasis is placed on efficient cash repatriation and exit structures. The reduction of the statutory Dutch dividend withholding tax will add even more to providing a competitive advantage, besides the already existing extensive Dutch tax treaty network.
The simplification of the applicability of the Dutch participation exemption will deliver more transparent rules for on-shore Dutch tax resident holding structures in which capital gains and dividends are received tax free. This will further enable the buyer to structure and model tax efficient cash flows within a new target group effectively. The latter may be further enhanced through the introduction of a special rate in relation to inter-company financing and licensing arrangements.
Overall, the 2007 Dutch tax reform provides quite a number of opportunities.
PricewaterhouseCoopers M&A Tax Services will continue to explore the opportunities and possible complexities of the new Dutch (corporate income) tax rules and inform you as this legislative process moves forward.
PricewaterhouseCoopers M&A Tax Services in the Netherlands offers a wide range of services at all stages of the M&A process. We assist companies making acquisitions and disposals
and undergoing corporate reorganisations, using proven processes and drawing upon expertise from throughout our global network. For more information please contact Hans Seeling (by e-mail hans.seeling@nl.pwc.com or by telephone at +31 20 568 4108) or Machiel Visser (by e-mail m.visser@us.pwc.com or by telephone at +1 (646) 471 2695). Alternatively you may visit our website at www.pwc.com/nl/mergersandacquisitions
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