21 Jun The ‘Non-Businesslike Loan’ in the Netherlands
If a company needs financial resources, this can be met within a group. For example, a parent company can provide funds as equity. In exchange for this equity, the subsidiary will pay dividend to the parent company. Based on the participation exemption in the Dutch tax law, this dividend is usually exempted for tax.
If a loan is granted by the mother or another company within the group to the company that needs financial resources, the company that receives the loan (the debtor) may deduct the paid interest against the revenue. The interest receivable from the company who provides the loan (the creditor) is taxed. In addition, if the debtor can not repay the loan, the creditor may deduct the loss thereby suffered from its profits.
The beforementioned effects applies if the provided loan within the group is ‘businesslike’, but not if it is a non-businesslike loan. A non-businesslike loan is when a loan is provided under such circumstances and conditions that an independent third-party would not have provided this loan under these conditions or only at a profit sharing interest. For example, would a bank provide this loan under similar circumstances and conditions? If a loan is not business-like, then it will not be strictly treated as debt capital, but as equity. The paid interest by the debtor is therefore not deductible from its revenue.
A non-businesslike loan may also occur between a company and the Director Shareholder. For example, there is a company which provides a loan to the Director Shareholder and the Tax Authority conclude this loan is non-businesslike. The loan received by the Director Shareholder may be revised to dividend payment or wage, which is taxed.
To determine whether a loan is businesslike or non-businesslike, the conditions and circumstances need to be examined. The intentions from both parties will be examined at first with regards to whether they opted for a loan and not for a capital injection (equity). To quick examine whether a loan is businesslike or non-businesslike, the following questions can be answered:
- Did the debtor provide certainty for the obtained loan?
- Is the debtor in a position to repay the loan based on his income or net worth?
- Is there an interest charged and is the interest percentage acceptable?
- Is there a repayment schedule?
- Have there been repayments attempts?
If the questions are mostly answered with “No”, there may be a non-businesslike loan. All in all, this list is not decisive whether a loan is business-like or not. All the factors of the loan need to be examined. In practice, this may differ for each situation. In addition, if a loan is businesslike at first, it may also turn non-businesslike during the term if the conditions in the agreement does not met. If the Tax Authorities conclude a loan is non-businesslike, the consequence is that they will revise earlier assessments in which this loan affects. If you would like to receive more information and/or professional advice regarding the qualification of a loan, do not hesitate to contact us.