Policy decision on hybrid loans | Deloitte


Policy decision on hybrid loans

The State Secretary for Finance published a policy decision on the tax qualification of loans with a (very) long term and a higher fault based liability risk.

21 september 2017

Dutch version

Qualification of loans

In the Netherlands, a distinction is made between the tax treatment of equity and debt capital. A (formal or informal) payment on shares qualifies as equity, while a loan is, obviously, debt capital. Broadly speaking, the payment for providing equity (dividend) is non-deductible for the payer and untaxed for the recipient (provided the participation exemption applies). On the other hand, the payment for providing debt capital (interest) is basically deductible for the payer and taxed for the recipient. Ordinary loans clearly qualify as debt capital. Yet in the financial world use is often made of hybrid forms, in which the funding has characteristics of both a loan and an equity instrument (hybrid loans). Although this is usually based on tax reasons, sometimes economic motives play a role, too.

(Re)qualification of funding

If a hybrid loan is provided, for tax purposes the funding is to be qualified as equity or debt capital. If it involves a repayment obligation, the assumption is that the funding qualifies as a loan both under civil law and for tax purposes. Under certain circumstances, however, it may be requalified into equity for tax purposes. Dutch Supreme Court case law distinguishes three categories of loans that should qualify as equity for tax purposes: sham loans, bottomless pit loans, and participating loans. Of the abovementioned three types of hybrid loans, case law is clearest on participating loans. This shows that it effectively involves a participating loan if the loan is subordinated at the level of all unsecured creditors, has a term of more than 50 years, interim payment claims by the creditor are possible only in the event of liquidation, bankruptcy and/or suspension of payment, while the interest is (virtually entirely) dependant on the debtor’s profit. For corporate income tax purposes it has been determined that the participation exemption applies to a participating loan if the taxpayer or an affiliated entity already has a participation in the debtor based on their shareholding.


In a recent policy decision, the State Secretary for Finance made a statement on the qualification of types of loans that combine a higher degree of fault-based liability with long - sometimes even unlimited - terms. The State Secretary excludes from qualification as loans those with an unlimited term (perpetuals) in respect of which financiers have a right to repayment if the creditor goes bankrupt or is dissolved, which right ranks equally with that of the (preference) shareholders (fault-based liability). After all, the State Secretary argues that there is no repayment obligation that is typical for a loan. In the decision the State Secretary approves that the participation exemption applies to such loans, despite the fact that - strictly speaking - it does not involve participating loans. Note that for this, the conditions for application of the participation exemption must have been met. So, a participation based on the shareholding in the creditor should already exist at the level of the creditor or an affiliated entity of the creditor. On top of that, prior to concluding the perpetual, the financier should file a written request for application of the approval, also declaring that the participation exemption applies irrespective of whether this is beneficial in his case. The State Secretary finally observes that the payer of the payment on such a perpetual does not have to withhold dividend withholding tax.

Fixed term variant

The policy decision also addresses fixed-term fault-based liability loans (schuldaansprakelijke leningen). The State Secretary argues that these do qualify as loans, despite their higher risk profile. Even if the duration of the term of such loans is such that to that no independent meaning is to be attributed to that, the State Secretary considers them to be loans, provided there are no other grounds that would require the loans to be qualified as capital. However, the State Secretary takes the position that fault-based liability loans with a fixed term of over 50 years qualify as participating loans if the payment is profit-related. In the policy decision he elaborates on the concept of profit-related. The State Secretary argues that this is the case if the borrower can postpone a fixed rate of interest in the absence of profit or when “dividend is combined with fault-based liability.”

Relevance of the decision

Precisely because of their relatively clear position in case law, until recently participating loans were fairly popular among international tax lawyers. If, for instance, the country in which the debtor of such a loan is established qualifies participating loans as ordinary loans, while the participation exemption is applied at the level of the creditor in the Netherlands, the interest relating to the loan may be deductible at the level of the (group) debtor without tax being charged from the (group) creditor. However, since 1 January 2016 the Dutch participation exemption can no longer be applied to payments received that are deductible from the profit at the level of the foreign debtor.

Nonetheless, it is relevant to qualify loans for tax purposes. After all, such qualification also applies vis-à-vis Dutch debtors, and is thus relevant for deductibility of the payment effected. Moreover, the exclusion from the participation exemption described above only applies for the payment received, not for the principal. The participation exemption thus applies to profits and losses relating to the principal of a participating loan, so they do not affect the taxable profit. Please note that the decision has the nature of an approval insofar as it relates to fault-based liability perpetuals. The policy decision further shows that the State Secretary argues that such types of loans do not qualify as participating loans at all. It is unclear, however, whether this means he also takes the position that (without the approval) the participation exemption cannot be applicable to fault-based liability perpetuals.

Note that not applying the participation exemption may be advantageous to creditors, because in that case (book) losses on the loan are deductible. The main advantage of the policy decision is that it better shows how the Tax Administration views fault-based liability loans (whether or not with a limited term). This definitely serves legal certainty, and thus benefits the public at large.

Source: Decree of 29 August 2017, no. 2017-38941, Stcr. 2017, no. 50521

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