Netherlands: redeemable preference shares classified as loan
In the Netherlands X NV, a Dutch holding company owned an Australian company, A1 Ltd. NV X Ltd. has provided loans to A1 Ltd. The subsequent interest received was taxed in the Netherlands.
In 2004 X NV and A1 Ltd converted the loans into redeemable preference shares. The conditions are particularly as follows:
-the redeemable preference shares pay an annual, cumulative dividend of eight percent in the first two years;
-in subsequent years the dividend increases with one percent per every two years to a maximum of twelve percent;
-the redeemable preference shares have priority over common stock in payment of the dividend and the repayment of principal;
-the redeemable preference shares may be redeemed at any time and will have to be redeemed fully after ten years;
-the holders of the redeemable preference shares have no voting rights except in case of termination of the business or with respect to decisions that affect the rights of redeemable preference shares itself.
The financial statements of NV X respectively A1 Ltd presented the redeemable preference shares as long-term loan respectively debt and the dividend paid as interest income respectively expense.
According to NV X the participation exemption is applicable on the dividend received. The tax inspector is of the opinion that the redeemable preference shares is a loan and the dividend is thus taxable as interest.
The court notes that the redeemable preference shares were issued under the following conditions:
-a fixed and then gradually rising interest rates;
-a rate that is independent of the profits;
-a fixed term;
-no voting rights.
In the opinion of the court the redeemable preference shares are in fact a loan. That NV X and A1 Ltd classified the redeemable preference shares as a long-term loan or debt in the financial accounts, is for the court also an indication that NV X and A1 Ltd in fact agreed to a loan.
Relevance to practice?
In the Netherlands when providing finance, it is important to determine under which conditions it is given so that the financing also gets the desired classification for tax purposes. The qualification of the finance in the financial statements was for the court in this case an indication that it was also a loan for tax purposes.