Proposed excessive borrowing legislation submitted for Lower House scrutiny

The presentation of the 2019 Tax Plan, back in September 2018, involved the Dutch Cabinet announcing that draft legislation was being prepared aimed at counteracting excessive borrowing from their own company by substantial interest holders. The Bill to the relevant effect has now been submitted to the Lower House. The current – legislative – situation leaves room for substantial interest holders to defer being taxed on amounts borrowed from their own company, to the point where they may in fact avoid being taxed altogether.

Substance of proposed legislation

Any substantial interest holder who owes his or her company more than 500,000 euros in the aggregate will be regarded as having collected the surplus as income from substantial interest, by having the relevant amount classified as a fictitious regular gain. The precise amount of indebtedness is to be determined, as at (financial) year end, at its then-face value. As the new measure is to remain confined to the determination of substantial income-generated income, it will have no other taxation-related consequences and will therefore leave income taxation in Boxes 1 and 3 unaffected, nor will it have any impact in a civil law sense (in that the substantial interest holder’s debt to his or her company will continue to exist and he or she will still be liable for debit interest and repayment).

The fictitious regular gain can have a positive or negative value. The latter serves the purpose of preventing double taxation economically (beneficially).

Circle of stakeholders

The substantial interest holder together with his or her ?spouse or civil or life partner? is to be taxed on their joint excess indebtedness over and above 500,000 euros to the company, as will be any of the substantial interest holder’s (personal) associates – i.e. anyone who is a relative by blood or marriage in the direct line, be it of the substantial interest holder or of the latter’s partner – who are indebted to the company. Any such associate’s indebtedness to the company is to be attributed to the substantial interest holder him or herself where the outstanding amount exceeds 500,000 euros and the associate him or herself is not a substantial interest holder.

Exception for owner-occupied home

Owner-occupied home related indebtedness as per the Box 1 home ownership scheme is to be left out of consideration in vetting the substantial interest holder’s aggregate indebtedness to the company against the 500,000 euro limit, on condition that the company should have been presented with right of mortgage on the home as security for the outstanding debt. It should be noted that this condition is not to apply to pre-existing owner-occupied home related debts from before year-end 2021.

Maximum indebtedness

An aggregate indebtedness maximum has in principle been set in the amount of 500,000 euros, to be incremented by the amount of the taxable fictitious regular gain. This has been done to avoid fictitious regular gain being taken into consideration from one year to the next for the same amount in excessive indebtedness.

Double taxation prevention

Any substantial interest holder having borrowed in excess of 500,000 euros from his or her own company could in principle end up being taxed twice, i.e. not just on his or her fictitious regular gain, but also on the subsequent dividend payment earmarked for repayment of the debt. He or she would thus fall prey to double taxation economically. A similar situation would come about in the event of the substantial interest holder selling his or her shares in the company, in that the surplus value of the shares would be liable for Box 2 taxation. To stop this happening it has been decided to allow the fictitious regular gain to have a positive or negative value. The latter would be the case where repayment of (part of) the debt occurred after the maximum of 500,000 euros had been augmented by the positive fictitious regular gain, resulting in the aggregate debt at (financial) year-end turning out lower than the maximum amount inclusive of the increment, with the difference between the two being factored in – as a negative fictitious regular gain – when calculating the income from substantial interest for the year in which the repayment towards the debt was made, and with the maximum being reduced accordingly.

Effective date

The new legislation is scheduled to take effect on the first of January 2023. This should give substantial interest holders enough time to bring their indebtedness to their company under the 500,000 euro limit.

Dutch version: Wetsvoorstel excessief lenen naar Tweede Kamer