Proposed Dutch Tax Breaks Get Mixed Reception From EC

by Ulrika Lomas, for LawAndTax-News.com, Brussels

08 February 2007

The European Commission announced on Wednesday that it has decided to open a formal investigation procedure under EC Treaty state aid rules into planned reductions of Dutch tax rates for net interest received on intra-group loans, under a scheme called 'Groepsrentebox'.

In July 2006, The Netherlands notified a proposal for the tax break scheme with an annual budget of EUR475 million, aimed at reducing differences in the fiscal treatment between two instruments of intra-group financing, namely equity and debt.

Currently, when a company injects capital into another company, the dividend it receives is tax exempted, whereas when it lends money, the interest received is taxed at the general corporate tax rate of 25.5%.

The same is true for companies that receive funds: dividends paid for capital injections are not tax deductible, whereas interest paid for loans can be deducted at the general corporate tax rate of 25.5%.

The opening of an in-depth investigation enables also interested third parties to submit their comments on the proposed measures, but does not prejudge the outcome of the inquiry.

At the same time, the Commission decided not to raise objections to the proposed reduced tax rate for interest on short term deposits, provided these deposits are aimed at acquiring at least 5% of the shares of a company.

This latter measure would benefit equally all companies subject to Dutch corporate tax and would therefore be compatible with the Single Market.

Neelie Kroes, Competition Commissioner, explained that:

"We must ensure that fiscal reforms do not introduce incentives that significantly distort companies' decisions on the location of their business activities within the Single Market".

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