Participation exemption on profit sharing loans
In a series of judgments the Dutch Supreme Court has provided more clarity with respect to the question in which case a the supply of a loan takes place under such conditions that in fact capital (i.e. equity) is supplied (the so-called participating loan).
In the case about which the Supreme Court decided it concerned a Dutch company that owned a subsidiary in France. In 1992 the Dutch parent company provided capital to the French subsidiary by means of a ‘prêt participatif’. The ‘prêt participatif’ is an instrument according to French law that is subordinated to the other creditors. Furthermore in the case at hand parties agreed on a duration of 95 years. The compensation paid to the Dutch parent was partially fixed (1% per year) and for the rest in the form of a percentage of the profit of French company.
In a judgment from 1998 the Supreme Court had formulated the criteria to ascertain whether a loan should be considered in fact as equity. According to that judgment from 1998 the following three cumulative criteria must be satisfied: :
i. the compensation for the loan depends on the profit; :
ii. the debt is subordinated to at all other creditors and; :
iii. the debt has no fixed duration, but is only repayable at the event of bankruptcy, creditors moratorium (‘sursceance van betaling’) or liquidation. :
In the recent judgments the Supreme Court assesses the ‘prêt participatif’ and gives further detail to the criteria which were formulated in 1998.
In spite of the fact that the compensation is partly fixed (therefore not fully profit depending) it is still possible to meet the first criterion. In this case the fixed part of the compensation was 1% whereas the normal interest on the loan was at least 8%. The Supreme Court concludes that the compensation for the present loan is nearly entirely profit depending and with that observation it meets the first requirement.
Furthermore the Supreme Court judges that the duration of the loan is extremely long - more than 50 years. For that reason the circumstance that the loan has a fixed duration of 95 years has no relevance. This provides much clarity: in the taxation the border between temporality and perpetuity lies on 50 years.
At least evenly interesting as the above is the straightforward judgement of the Supreme Court that the benefits which the parent company realises from the ‘prêt participatif’ qualify for the participation exemption. Concerning the application of the participation exemption on participating loans so far obscurity existed because the Supreme Court never actually had confirmed this. Also this obscurity has now come to an end.
