On November 25, 2013, the European Commission proposed modifications to the European Union (EU) Parent-Subsidiary Directive. This proposal contains (i) the introduction of a general anti-abuse rule against artificial structures, and (ii) actions against hybrid loan arrangements.
In a letter that was sent to the Dutch Parliament on January 17, 2014, the Dutch State Secretary of Finance responded to questions raised by members of Parliament with regard to the proposal of the European Commission. The State Secretary indicated that the Dutch government supports the introduction of legally enforceable rules in the Parent-Subsidiary Directive to prevent undesirable consequences of hybrid loans. However, as the content of the proposed modification of the Directive is still subject to discussion, the State Secretary does not see any need to amend the Dutch Corporate Income Tax Act at this stage. In the letter, the State Secretary emphasized again that the Dutch government does not believe in the introduction of a general anti-abuse rule because such a rule would typically contain “a lot of overkill.”
Moreover, the outcome of two Dutch Supreme Court cases of February 7, 2014, also points in the same direction. It was ruled that preferred equity instruments could not be re-qualified into loans, as the legal form was considered a leading factor. These decisions and the outcome from the State Secretary have created a clear playing field and shows that the Netherlands still offers flexibility typically sought in international tax structuring.
The French government, however, shows us a different viewpoint. In anticipation of the modifications of the Parent-Subsidiary Directive and as a result of the Organisation for Economic Co-operation and Development (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS), which was published in July 2013, the French government decided to introduce a measure against hybrid loan structures. The French government’s solution to counter hybrid loan structures is to prohibit the deduction of interest on loans between related companies when the corporate income tax on this interest in the lending company, irrespective whether this is a French resident, does not amount to at least one quarter of the tax as determined under ordinary French tax rules [up to 9.5% for multinational enterprises (MNEs)]. The measure applies to companies with a fiscal year that has ended after September 15, 2013. In this regard, a claim against this new French measure has already been filed with the European Commission. It is therefore uncertain whether the new French measure is in line with the freedom of establishment within the EU.