Netherlands clarifies taxation of hybrid instruments, including perpetual and long-term loans

by Jian-Cheng Ku and Tim Mulder, DLA Piper, Amsterdam

The Netherlands government on September 9, 2017, issued a decree and policy statement concerning the treatment of hybrid financial instruments for corporate income tax and dividend withholding tax purposes.

The decree focuses particularly on the taxation of perpetual and long-term loans, thus enhancing certainty.

The aim of the decree, prepared by the Dutch State Secretary of Finance, is to provide more guidance on the qualification of certain hybrid financial instruments as debt or equity for Dutch tax purposes. The new guidance has retroactive effect as from August 29, 2017.

The decree is specifically relevant for companies granting or attracting financial instruments that have civil law characteristics of both debt and equity. Even if such financial instruments are structured for sound business reasons they may have adverse Dutch tax consequences.

Equity versus debt

For Dutch tax purposes, the treatment of equity and debts differs. A contribution of capital qualifies as equity whereas a loan qualifies as debt.

Remuneration for equity (dividends) is generally not deductible at the level of the distributor and is exempt at the level of the recipient, whereas the remuneration for debt (interest) is deductible at the level of the debtor and taxable at the level of the creditor.

In principle, whether a financial instrument should be considered as debt or equity for Dutch tax purposes is determined on the basis of its civil law qualification.

The essential characteristic of a debt is a repayment obligation of the debtor. For equity, there is no fixed term and no obligation to repay the principal amount; only in case of liquidation or dissolution of the company may the contributor claim (part of) the liquidation proceeds.

In practice, there are situations in which a financial instrument has characteristics of both debt and equity. Such a financial instrument is considered a hybrid loan. In the published decree, the Dutch State Secretary of Finance provides more guidance on the qualification of such instruments.

Requalification of loans

If a loan has a repayment obligation, the debt generally qualifies as debt for both civil law and tax purposes.

However, in line with Dutch case law, there are three exceptions where a debt for civil law purposes nevertheless should be treated as equity for Dutch tax purposes. These exceptions are sham loans (schijnleningen), loss financing loans (bodemloze putleningen), and participating loans (deelnemerschapsleningen).

To qualify debt as a participating loan, all of the following conditions – developed in Dutch case law – need to be met:

  • The remuneration on the loan is dependent on the profit of the borrower
  • The loan is subordinated to the claims of all other creditors with interim claims by the creditor only possible in case of liquidation, bankruptcy, and/or suspension of payment
  • The loan has no term or is perpetual (a loan having a term in excess of 50 years is considered to have met this condition)

Subject to certain conditions, a participation loan qualifies under the Dutch participation exemption.

Perpetual loans with debt liability

The decree explicitly discusses loans that have a perpetual term where the principal amount is repaid to the creditor only in the event of liquidation or dissolution of the debtor.

In situations where a perpetual loan provides that the creditor has no right of repayment and will be ranked pari passu with shareholders (with preferred shares), the creditor is treated effectively the same as a (preferred) shareholder in case of liquidation or dissolution of the debtor, the decree states.

Such a perpetual loan should be reclassified as equity because the repayment obligation is missing, the decree states. The remuneration paid on such loans is therefore not deductible for Dutch corporate income tax purposes.

The State Secretary of Finance also concluded that, if all other conditions are met, the creditor may apply the Dutch participation exemption to such loans even though they are, strictly speaking, not participating loans.

At the moment of issuance of such a perpetual loan, the creditor should file a written request with the Dutch tax inspector to confirm the applicability of the participation exemption and should also accept any adverse tax consequences due to the application of the participation exemption.

The decree also concludes that the payment of interest on such a loan is not subject to Dutch dividend withholding tax.

Long term loans

The decree also discusses the taxation of loans that have a long fixed term where the principal amount is repaid to the creditor only in the event of liquidation or dissolution of the debtor.

In principle, the loan should qualify as debt since there is a repayment obligation. However, if the loan has a long fixed term, the loan may be considered a participating loan and hence recharacterized as equity for Dutch tax purposes.

The State Secretary of Finance stipulates that, in some circumstances, its primary position will be that, due to the debt liability of the creditor, the long term loan should be reclassified as equity.

Specifically, the fixed term must be more than 50 years and remuneration on the loan must be dependent on the profit of the debtor, the Secretary concludes.

Instruments with debt liability for the creditor bear profit dependent remuneration if for example they have fixed interest that can be deferred in the absence of profits of the debtor or if they pay dividends combined with debt liability, the decree concludes.

Jian-Cheng Ku

Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations, and planning and design of transfer pricing policies.

Tim Mulder

Tim Mulder

Tax adviser at DLA Piper, Amsterdam

Tim Mulder advises on Dutch and international tax aspects relating to international tax planning, M&A transactions, corporate restructurings, private equity and investment fund transactions.


Don't miss the latest tax and transfer pricing news! Sign up for our FREE newsletter