EBITDA rule: NL raises percentage to 25%, limits franchise
18/09/24
This aticle was last update on 31 October 2024.
The earnings stripping (EBITDA) measure is a generic interest deduction limitation, on the basis of which the deduction of interest and related costs (such as foreign exchange results) above a threshold of EUR 1 million (the franchise) is capped at a certain percentage of the adjusted taxable profit, also known as fiscal EBITDA. The Dutch government proposes to amend the current rule in two places. It is proposed to increase the percentage of fiscal EBITDA from 20% to 25%. As a result more interest will be deductible for many taxpayers. On the other hand, a measure is also proposed that will reduce the deductibility of interest. This measure only applies to real estate companies. Such companies will no longer be able to make use of the 1 million euro franchise.
What does this mean for your company?
If your company (or fiscal unity for corporate income tax purposes) has an interest balance of more than EUR 1 million, a higher amount of interest may be deductible from the taxable profit from 2025. However, this also depends on the fiscal EBITDA of your company. If you have real estate companies in your Dutch group, it must be checked whether these companies qualify as real estate companies under the new rules. This may be the case, in particular, where those companies lease the property to third parties, that is to say, outside the group. If that is the case, the EUR 1 million franchise cannot be used at all for these companies from 2025 onwards.
The 2025 Tax Plan contains two adjustments to the earnings stripping measure (Section 15b CITA 1969). This provision stems from the EU Anti-Tax Avoidance Directive 1 (ATAD1). This Directive gives EU Member States a certain amount of leeway to make their own choices.
1. Expansion of interest deduction due to increase in the percentage of earnings stripping measure
It had already been announced in the Outline Agreement that the percentage for the application of the earnings stripping measure will be increased from 20% to 25% of the fiscal EBITDA. The coalition partners propose to increase the percentage from 20% to 25%. This 25% would be the European average. However, according to PwC's own research, there are only two EU countries that have set the interest deduction limitation lower than the 30% allowed under ATAD I. These are Finland with 25%, and the Netherlands with 20% since 2022. When the earnings stripping measure was introduced in 2019, the percentage was still 30%.
This increase in the percentage from 20% to 25% is now indeed part of the 2025 Tax Plan. The interest balance up to EUR 1 million (the franchise), is not limited in deduction (at least not on the basis of this interest deduction limitation). On balance, this means that for certain companies there will be more room to deduct interest on loans.
The earnings stripping measure is a generic interest deduction limitation. In addition to this provision, the CITA 1969 also contains a number of specific interest deduction limitations. These are used in transactions or interest flows defined by law. Interest that is not deductible under the specific interest deduction restrictions cannot still be deducted under the application of the franchise of EUR 1 million, but is completely excluded from deduction.
2. Franchise cancelled for all real estate companies
The franchise of 1 EUR million euros for the application of the earnings stripping measure will be abolished for companies whose assets consist mainly of real estate leased to third parties (real estate companies) for at least half of the year. These taxpayers can only apply the 25% rule and are therefore no longer entitled to the franchise. If the interest balance is less than EUR 1 million, this may lead to a more limited interest deduction.
This rule is intended to prevent a real estate company from being split up so that the franchise can be used several times within the group (anti-fragmentation). However, the scheme will be introduced more broadly, so that also a single real estate entity within a group will no longer be able to make use of the franchise.
Qualification real estate company
Firstly, the company's assets must consist mainly of immovable property (assets test). This includes:
Apartment rights;
rights of superficies;
leasehold rights;
rights of usufruct over immovable property; but also
the beneficial ownership of immovable property (or the rights thereto mentioned above)
If the immovable property is used in one's own company or within the group, it does not count as being rented out to third parties. In order to determine whether the property is leased within the group, the criterion is that the company to which the let is made is an 'affiliated entity'. Group must therefore be seen broadly. After all, there is an affiliated entity when there is an immediate or indirect interest of 1/3 or more between the two companies.
"Mainly" generally means a percentage of 70 percent. This means that if for at least half of the year 70 per cent or more of the assets consist of real estate leased to third parties, the company is regarded as a real estate company.
For the assest test, the total of the assets must be corrected. Participations that fall under the participation exemption, claims on related entities or related natural persons and (in short) foreign assets that are exempt in the Netherlands (see below) do not count as assets for the application of the 70% criterium. It is therefore not simply possible to artificially 'inflate' the holdings of a possible real estate entity.
Foreign assets
When determining whether the asset test is met, as mentioned above, assets located abroad, whose profit is exempted in the Netherlands based on the so-called object exemption, are not included.
For foreign taxpayers, it has been arranged (by amendment) that the assets of the foreign head office are also excluded from the adjusted assets.
This measure will apply for the first time for financial years beginning on or after 1 January 2025.
Follow us
