Refinancing has always been an important part of the corporate and private equity landscape. However, in recent years, we have observed an increase in the volume of refinancing activities. Businesses across various sectors are reassessing their financing structures due to factors such as maturing loans and shifting global market dynamics.

At its core, refinancing involves replacing a company’s existing debt arrangements with new debt arrangements, either with the same lender or through a new financing party. Refinancing generally serves two main objectives. The first main objective is to reduce the cost of capital by securing better (interest) terms, extend maturity dates, or add favourable covenants. The second main objective is to extract value by returning capital to investors.

In practice, these objectives play out through different strategies. For example, value can be extracted by upsizing external debt facilities to finance dividend distributions to fund investors. Another common approach involves optimizing the debt structure within a group through debt pushdown arrangements, where the debt is strategically allocated across entities. In distressed situations, other considerations may be relevant.

This article highlights six key Dutch corporate tax topics that should be considered in refinancing scenarios.

1. Financing Costs: Immediate Deduction vs. Capitalization

When refinancing a loan in the Netherlands, the tax treatment of both the historic financing costs associated with the original loan and the financing costs associated with the refinancing arrangement requires careful assessment.

In March 2024, the Dutch Supreme Court ruled that immediate deduction of non-recurring financing costs such as closing costs, commitment fees and issuance costs is generally allowed if they relate to obtaining a loan rather than its ongoing availability. However, if the non-recurring costs are effectively used to lower future annual interest costs, these costs must be capitalized and amortized.

Financing costs associated with the original loan should also be given consideration. If these costs were initially capitalized and amortized over the term of the original loan, they may need to be recognized in full immediately upon premature termination as the related benefit period has ended.

Since the tax treatment of financing costs may create book-to-tax differences that impact deferred tax positions, proper documentation of the tax positions taken is essential.

2. Earnings Stripping Rule: Optimizing Interest Deduction Positions

Refinancing may also affect the Dutch earnings stripping rule calculations. The earnings stripping rule is the Dutch generic interest deduction limitation rule which, in short, limits the deductibility of net financing costs to the higher of EUR one million or 24.5% of the adjusted EBITDA each year for corporate income tax purposes. Any remaining non-deductible interest can be carried forward indefinitely.

Assessing the impact of the earnings stripping rule prior to refinancing is especially relevant in debt pushdown structures. In these structures, acquisition debt is either pushed down to the Target level (for example through on-lending) or, as is common in the Netherlands, a fiscal unity is established for Dutch corporate income tax purposes between the acquisition vehicle and the Target. In the latter case, the earnings stripping rule is applied at the fiscal unity level, meaning the Target's operating profits are included in the adjusted EBITDA, thereby expanding the Group's interest deduction capacity. Allocating debt arrangements within the acquired Group can optimize interest deductibility, provided that the overall structure remains compliant with the Dutch anti-abuse rules.

As refinancing will impact the net financing costs, it may also impact the balance of non-deductible interest that is carried forward under the earnings stripping rule. Consequently, a deferred tax asset (DTA) may need to be recognized for the expected future tax benefit, or the existing DTA may need to be adjusted.

3. The Dutch Anti-Abuse Interest Deduction Limitation Rule: Maintaining the Parallel Loan Structure

For Dutch entities with intercompany interest-bearing loans that fall within the scope of the Dutch anti-abuse interest deduction limitation rule (i.e., Article 10a Dutch Corporate Income Tax Act), refinancing requires careful consideration if the deductibility of the interest relies on the counterevidence rule.

If the counterevidence rule has historically been applied at the level of a Dutch entity by demonstrating that both the intercompany loan and transaction are based on business reasons - such as in the case of an external acquisition financed by fully parallel loans within the group that are ultimately obtained from a third-party - it should be ensured that the financing structure remains intact after refinancing and this is properly documented.

For example, in an acquisition structure, an external loan could be obtained at the level of an intermediate holding company (Midco) which is consequently on-lent to an acquisition vehicle (Bidco) to acquire a Target. Bidco may have applied the counterevidence rule by stating that the conditions of the intercompany loan mirror the conditions of the externally obtained loan by Midco.

If the external loan at the level of Midco is refinanced following the acquisition of a Target by Bidco, the fully parallel loan structure might be compromised for Bidco, as the loan conditions may no longer mirror the original external financing arrangement. If Bidco no longer qualifies for the counterevidence rule, this may result in significant interest deduction limitations.

Even if parallelism is maintained, the application of the general Dutch anti-abuse rules should be assessed prior to implementation. Recent Dutch Supreme Court rulings confirm that the Dutch general anti-abuse rules can deny interest deduction in acquisition structures even where the counterevidence rule has been successfully applied, unless the lender performs a pivotal financial function within the group. Given the active development of this area, early engagement with our Dutch tax advisors is strongly recommended.

4. Conditional Withholding Tax: Cross-Border Payment Risks

In principle, there is no Dutch withholding tax on interest paid. However, since January 2021, the Netherlands imposes a conditional withholding tax on interest payments (in)directly made to related entities located in low-taxed jurisdictions. Payments to third parties are not in scope. The conditional withholding tax, currently set at the highest Dutch corporate income tax rate of 25.8%, also extends to payments deemed to be abusive or involving hybrid mismatches.

The conditional withholding tax is relevant in debt pushdown structures involving cross-border financing arrangements, as these typically create multiple layers of intercompany payments across different jurisdictions. For example, when a Dutch entity obtains a loan directly or indirectly from a credit facility entity in the group that is a tax resident of a low-taxed or blacklisted jurisdiction, the conditional WHT may apply. Even if there is no involvement of a tax resident in a low-taxed or blacklisted jurisdiction, it should be confirmed that there is no hybrid entity mismatch to avoid tax leakage up to 25.8%.

5. Distressed Debt: Managing Tax Recapture and Waiver Implications

In distressed debt situations, companies typically seek to renegotiate or renew their current agreements to improve financial stability or avoid bankruptcy. As waivers and impairments often occur in distressed situations, it is important to assess whether the Dutch taxable recapture rules apply.

When restructuring debt involves the transfer of historically impaired loans within a group by a Dutch entity, the taxable recapture rules can result in previously recognized tax-deductible impairments being reversed and treated as taxable income. Similarly, a formal waiver of a historically impaired loan within a group by a Dutch entity may trigger the recapture rules, unless the resulting waiver profit is included in the debtor’s taxable base or offset against its tax losses.

When a Dutch entity is the debtor, a waiver by the creditor can lead to waiver profit. However, the Dutch debt-waiver exemption may be applied under specific conditions, exempting the income for Dutch corporate income tax purposes. Applying the debt-waiver exemption will also impact the earnings stripping rule calculation as the adjusted EBITDA will be lower.

6. Transfer Pricing: Demonstrating Arm’s Length Debt Capacity

When new intercompany loans are issued, or the terms and conditions of existing loans are adjusted, conducting a transfer pricing review is essential. Prior to implementing (updated) loan agreements, it should be ensured that the intercompany loans are issued at arm’s length terms and conditions and are consistent with the group’s existing transfer pricing policies.

A critical component of this review is the debt capacity analysis. From a transfer pricing perspective, it must be assessed whether the borrower would have realistically been able to obtain similar financing from an independent third-party lender. This involves evaluating both the quantum of debt (maximum debt level the borrower can sustain) and the pricing (arm’s length interest rate based on creditworthiness). Key factors include the borrower’s projected cash flows, available security and existing debt levels.

This assessment is particularly relevant in debt pushdown structures, if acquisition debt is on-lent from the acquisition vehicle to the Target. A comprehensive debt capacity analysis with proper documentation is therefore essential to demonstrate the arm’s length nature of the structure and minimize the risk of challenges by auditors or the Dutch tax authorities.

Refinancing creates significant value creation opportunities for PE funds but only when tax considerations are addressed proactively. The issues outlined above frequently surface late in execution, where restructuring options may be limited. Early engagement with our Dutch tax advisors can help structure refinancing projects efficiently.

The A&M Tax team has extensive experience guiding PE funds and their portfolio companies through complex cross-border refinancings involving Dutch entities. If you are contemplating refinancing or have questions about its Dutch tax implications, please feel free to reach out to Marc Sanders or Frank Buitenwerf.