Abolishment of tax deductibility of coupon payments on AT-1 capital instruments announced per 1 January 2019

Article
NL Law
Expertise
Tax
On Friday 29 June 2018, the Dutch government made public its intention to abolish article 29a Dutch corporate income tax act ('DCITA'), per 1 January 2019. As a result of the abolishment of this provision, coupon payments on so-called additional-tier 1 ('AT-1') capital instruments made by banks and insurance companies will no longer be tax deductible. The amendment of the DCITA, which is aimed to be included in the tax package for 2019, will apply to coupon payments made after 1 January 2019, irrespective whether it concerns new or already existing AT-1 instruments.  
Amsterdam

According to 29a DCITA, coupon payments on AT-1 instruments made by banks and insurance companies are currently deductible for DCITA purposes. The Dutch State Secretary of Finance, however, wants to abolish this rule per 1 January 2019 for various reasons. In the view of the State Secretary, the tax deductibility of AT-1 coupon payments provides for an incentive to attract AT-1 capital, instead of real equity (‘core capital’). Furthermore, the State Secretary puts forward that the government is aiming for a more equal treatment of equity and debt for tax purposes, which is achieved by making debt financing less attractive from a tax perspective. In a memorandum of February of this year, dealing with measures to counteract tax avoidance and evasion, this argument was also used by the State Secretary of Finance to substantiate why the earning stripping rules to be introduced per 1 January 2019 will not include a group escape rule (which is included in the ATAD directive). In the February 2018 memorandum, the argument is also used to introduce a generic thincap rule per 2020, which rule is expected to be especially relevant for banks and insurance companies. The announced thincap rule was already seen as a defacto by-passing of article 29a DCITA, because the thicap rules require a minimum equity percentage of 8. 

Another reason why article 29a DCITA will be abolished per 2019, is pressure from the European Commission ('EC'). Already back in 2015 the EC raised the question whether article 29a DCITA could constitute state aid. In another letter, dating from June 2018, the EC is asking The Netherlands to amend their regime to take away the state aid concern of the EC. In this letter, the EC also makes clear to have reviewed the tax treatment of AT-1 capital instruments in other Member States, and where necessary, Member States were asked by the EC to take action where needed from a state aid perspective. 

After the abolishment of article 29a DCITA, the question remains how to qualify (debt or equity), the AT-1 capital instruments when looking at the tax case law of the Dutch Supreme Court. According to the Dutch State Secretary, the AT-1 capital instruments would in that case qualify as equity, but whether this indeed is the case remains to be seen. When looking into this question, also the (possible) effects of the thin cap rule, which likely will be introduced per 2020 (see above), should be taken into consideration. 

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