Many substantial shareholders (shortly put: shareholders with an interest of 5% or more in a company) borrow significant sums from their own companies. This allows them to use company funds for personal purposes, without having to pay taxes immediately. The legislator intends to limit this possibility by making the substantial shareholder pay personal income tax (hereinafter: PIT) on debts to their own company in excess of € 700,000. To this end, the Dutch House of Representatives recently adopted a legislative proposal aimed at excessive borrowing. If the Senate approves the proposal, the new legislation will enter into force on 1 January 2023. This legislation may also affect certain persons outside of the Netherlands who are subject to Dutch taxation.
What does this legislation entail?
If you are a substantial shareholder and you have borrowed more than € 700,000 from your company (or companies), the excess is subject to Dutch PIT in Box 2 (income from substantial shareholding). In cases of multiple substantial shareholdings or multiple loans, the loans are aggregated. If a loan is (partially) taxed in a particular year, that part is not taxed again in the following year.
This can be illustrated with the example of a substantial shareholder who has all the shares of BV A and BV B, and has borrowed € 550,000 from BV A, and € 400,000 from BV B (totalling € 950,000).
The ‘excessive debt’ is € 250,000 (950,000 -/- 700,000).
Dutch PIT is due on this amount, at the (soon to be progressive) tax rate in Box 2.
Who will be affected?
This legislation applies to all substantial shareholders. In a nutshell, you are considered a substantial shareholder if you own 5% or more (directly or indirectly) of the shares of a company established in The Netherlands. If you do not live in The Netherlands, but you do own the requisite shares in a Dutch company, you also fall within the scope of the legislation. Finally, if a Dutch resident shareholder has a substantial shareholding in a company that is not established in The Netherlands, these rules also apply.
The maximum amount of € 700,000 applies to the substantial shareholder together with his or her fiscal partner. Loans from the substantial shareholder’s company, to their relatives by blood or marriage in the direct line (and their partners), also fall within the scope of this legislation and are added to the substantial shareholder’s loans. In such a case, taxes are levied from the substantial shareholder, rather than from their relatives.
If a protective tax assessment was issued in the past, concerning the emigration of a substantial shareholder, the measure may lead to collection of (part of) this protective assessment. This would not apply to protective assessments issued in relation to an emigration prior to 15 September 2015.
Are there any exceptions?
The measure also includes business-like debts. The levy applies to all loans from the own company, except specific loans taken out for an owner-occupied home. Such owner-occupied home loans issued from 1 January 2023 onwards must include a right of mortgage on that home. This requirement does not apply to pre-existing owner-occupied home loans. The qualification as owner-occupied home debt follows the definition that applies in Box 1 of the Dutch PIT. Non-domestic taxpayers (or domestic taxpayers with an own home abroad) therefore apply the same conditions in qualifying the owner-occupied home debt.
If a substantial shareholder with a substantial shareholding in a foreign company immigrates to The Netherlands, the threshold is calculated in a different manner. In such cases, taxes may be due insofar as the loans exceed the total of the loans present at the moment of immigration.
The Netherlands has concluded tax treaties with many other countries. These treaties dictate which country may levy taxes on certain sources of income in cross-border situations, and may prohibit the levying of tax in relation to borrowing from the own company. It is possible that the Netherlands will not be able to effectuate this levy under many tax treaties.
When will the levy occur?
The new legislation is expected to enter into force on 1 January 2023. However, the annual moment of assessment of the debts is 31 December. As a result, a substantial shareholder who wishes to prevent the levy has until 31 December 2023 to repay any excessive debts, for example from own means or by way of a dividend distribution.
The new legislation makes borrowing from one's own company a lot less attractive. If you owe more than € 700,000 to your own company, consider reducing this debt to below that threshold. If you intend to repay the debt by means of a dividend distribution, it would be prudent - bearing in mind the announced changes to the tax rates in Box 2 - to look into the possibilities before the end of this year. If you have any questions about this legislation or how to reduce your debts to your own company, or if you would like to know more about the Dutch tax liability for foreign substantial shareholders, please contact our advisors.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly consultant.