AG argues that 10% requirement likewise applies to catch-all provision in lucrative interest scheme | Deloitte Netherl

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AG argues that 10% requirement likewise applies to catch-all provision in lucrative interest scheme

The AG argues that the catch-all provision of the lucrative interest scheme is also subject to a leverage mechanism. Rights comparable to shares are subject to the condition that the investment must constitute less than 10% of the total capital deposited by equity providers.

2 November 2021

Lucrative interest

The lucrative interest scheme aims to tax certain property rights in box 1 that, given the circumstances under which they have been acquired, must be deemed to be a remuneration for the work performed by a taxpayer, or by a person associated with them. Shares, receivables, debts, and similar rights can all fall under the scope of the scheme. Shares are subject to an additional requirement: the type of share acquired must be subordinate to other types of shares and the former must constitute less than 10% of the company's total issued capital. Shares may likewise fall under the lucrative interest scheme if they give entitlement to a preferred dividend of at least 15%.

Under the catch-all provision, the acquired capital rights can still qualify as a lucrative interest if the acquired shares fail to meet these requirements but in economic terms correspond to capital rights that do meet the requirements. The important thing to note here is that an extremely high return can be achieved with the assets compared to the invested capital and the risk run. It is unclear, though, whether the leverage mechanism characteristic of lucrative interest shares must also be met. Recently, Advocate-General Niessen delivered an opinion addressing this issue.

Management participation plan

This case involved a CFO in a company in the fashion industry whose employer gave him the opportunity, as part of a management participation plan, to acquire two types of depositary receipts for shares in his employer. As the company was facing strong financial headwinds, the value of these depositary receipts dropped from EUR 630,000 to EUR 1. The interested party wanted to write down the certificates against his box 1 income.

While the Court ruled that this was not possible, as the certificates did not constitute lucrative interest, the Court of Appeal held that the certificates did constitute lucrative interest. It argued that they enabled the holder to earn a return that was completely out of proportion to the capital invested and the risk run with the investment. The State Secretary subsequently lodged appeal in cassation, arguing principally that the catch-all provision, too, is subject to the requirement that the type of shares to which the rights relate represents less than 10% of the company's capital (this is called the leverage mechanism). However, this requirement is said to be broader in the catch-all provision than in the main rule.

Conclusion AG Niessen

AG Niessen agreed with the State Secretary’s arguments. He considered that the legislative history of the lucrative interest scheme shows that the catch-all provision must likewise include a leverage mechanism, albeit in a modified form. The class of shares to which the rights relate are not required to represent less than 10% of the nominal issued capital, but they are required to represent less than 10% of the total capital contributed by equity providers. This makes the catch-all provision broader than the main rule, since for the catch-all provision to apply, share premium and informal capital must be included as well. The AG argued that the State Secretary’s appeal in cassation is well founded. The wait is now for the Supreme Court to deliver its judgment.


Source: Conclusion AG 4 October 2021, 20/04413, ECLI:NL:PHR:2021:926

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