Tax treatment litigation costs W&I insurance – March 2024

On 14 March 2024, The Dutch tax authorities’ knowledge group published its policy regarding the tax treatment of litigation costs under a buyer W&I insurance.

The knowledge group policy relates to a buyer W&I insurance taken out in relation to the acquisition of a subsidiary. Buyer made a claim under the insurance policy which was rejected by the insurance company. The dispute resulted in legal proceedings and buyer was ordered to pay the insurance company’s litigation costs. The knowledge group takes the position that the litigation costs should not qualify as (non-deductible) acquisition costs. Consequently, such costs are tax deductible for the Dutch taxpayer.

Tax treatment acquisition costs
Under Dutch tax law, acquisition costs are generally not tax deductible under application of the participation exemption as such costs relate to the acquisition of a subsidiary.

In 2018, the Dutch Supreme Court ruled that transaction costs are non-deductible if there is a direct causal link (in Dutch: “rechtstreeks oorzakelijk verband”) between the costs and the acquisition of a subsidiary. Hence, transaction costs are considered non-deductible to the extent that the costs are incurred as a direct result of the acquisition of a subsidiary.

In 2023, the Supreme Court provided further guidance and ruled that a direct causal link which requires that the costs must be evoked by the acquisition, includes the condition that the costs have such a causal link to the acquisition that they were incurred because they were – objectively viewed – useful or necessary to achieve that acquisition. As a further clarification, the Supreme Court indicates that the costs would not have been incurred otherwise, i.e. without that (intended) acquisition. The intended direct causal link is lacking in the case of expenses that – although – would not have been incurred if the acquisition had not taken place, but which otherwise cannot contribute in any way to the realization of that acquisition. Such expenses are not in a direct causal connection to the acquisition and the expenses are therefore not useful or necessary to bring about that acquisition.

Tax treatment W&I insurance premium
In 2022, the Dutch tax authorities’ knowledge group also published its view on the tax treatment of W&I insurance premiums and payments. Based on the authorities’ internal policy, W&I insurance premiums should not be tax deductible, while payments under the W&I insurance should be tax exempt. The premiums should qualify as transaction costs that directly relate to the acquisition of a participation. As these costs are not tax deductible, a balanced outcome would result in payments under W&I insurance being exempt under the participation exemption.

For more information, please be referred to our tax alert.

Taxand’s take
The tax authorities’ knowledge group policy provides for a welcome confirmation for buyers who have taken out a W&I insurance. We agree with the reasoning behind this policy. The publication provides for additional comfort to take the position that litigation costs incurred in relation to a W&I insurance are deductible for Dutch tax purposes. The example in the published policy relates to litigation costs in relation to an unsuccessful W&I claim, however, it should in our view also apply in relation to a successful W&I claim.

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UPCOMING EVENTS Taxand Transfer Pricing Conference, 24-25 January 2024, Paris

Please join our Taxand professionals from around the world, as we gather in Paris for Taxand’s Transfer Pricing Conference 2024. Here we will share the latest developments impacting cross-border business operations.

This dynamic event promises to provide practical insights to address ever-changing business opportunities, as well as the chance to directly interact with your transfer pricing peers.

Conference VenueL’Apostrophe, 83 Avenue Marceau, 75008 Paris.

Our welcome reception will take place from 7pm on Wednesday 24 January at Le Fouquet’s, 97/99 avenue des Champs Elysées 75008 Paris. Coffee will be available from 8.30am and the conference begins at 9.15am on Thursday 25 January at L‘Apostrophe, closing with a networking reception from 6pm.

Our varied agenda will feature interactive sessions on a range of transfer pricing topics, including:

  • Special Guest Economist : Anne-Laure Delatte
  • OECD Pillars, Let’s Go!
  • Global Mobility & Transfer Pricing Impact
  • Inhouse Transfer Pricing Practice and Next Generation Leaders in Transfer Pricing
  • Transfer Pricing Adjustments.

We look forward to welcoming client guest speakers to share the stage with our international Taxand experts.

We hope you can join us!

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Update 30% ruling

The Dutch House of Representatives passed a number of amendments to the 2024 Tax plan. Two of these amendments relate to the further scaling down of the 30% ruling, provided the Dutch Senate will also agree to these changes. In addition, a number of changes to the 30% ruling have already been definitively adopted.

In the attached memo, we explain the planned amendments and also set out the changes already adopted.

Tax interest news alert – October 2023

On Budget Day 2024, the State Secretaries of Finance informed the House of Representatives of the proposed changes to the interest rates on interest on underpaid tax (tax interest) and interest on overdue tax (collection interest).

The new proposed system for determining the tax interest rates will be implemented per 1 January 2024. The aim of the new system is to reduce the difference between the tax interest rates for corporate income tax (“CIT”) and conditional withholding taxes (“conditional WHT”), on the one hand, and tax interest rates for other tax resources (such as dividend withholding tax, VAT, wage tax, real estate transfer tax and personal income tax), on the other hand. The interest rates will henceforth be set once a year, based on the latest ECB interest rate published before 31 October of that year and take effect as of 1 January of the following year (i.e., for the first time on 1 January 2024).
Tax interest rate for CIT, conditional withholding tax and solidarity contribution
The tax interest rate is currently frozen at 8%. Under the proposed system, the tax rate for CIT, conditional WHT and solidarity contribution will be set at the ECB rate for main refinancing operations plus 5.5 percentage points, rounded to half percentage points and with a minimum of 5.5%. The expected rate as of 1 January 2024 is 10%.
Tax interest rate for other tax resources
The interest tax rate for other tax resources (including dividend withholding tax, VAT, wage tax, real estate transfer tax and individual income tax) will be set at the ECB rate for main refinancing operations plus 3 percentage points, rounded to half percentage points and with a minimum of 4.5%. The expected rate as of 1 January 2024 is 7.5%. The interest tax percentage increased from 4% to 6% as of 1 July 2023.
Tax interest on allowances
The intention is to loosen the link between the statutory interest rate for other tax resources and the interest rate for surcharges. As of 1 January 2024, the rate for surcharges will then be frozen at 4%.
Recovery interest system
Recovery or collection interest (interest on overdue tax) for all tax resources and allowances will be frozen at 4% as of 1 January 2024. This has been chosen for the time being for implementation reasons. It is still being considered how collection interest can also be redesigned – by a subsequent Cabinet.
Taxand’s take
The final tax interest rates will not be known until the European Central Bank re-sets the ECB interest rate on 31 October 2023. However, it is expected that the tax interest rates will rise significantly and a small amount of additional income has been budgeted. Therefore, we would like to stress the importance of timely filing a (preliminary) tax return or otherwise requesting for a(n) (preliminary) assessment in order to minimize tax interest. Please contact your trusted Taxand Netherlands advisor for assistance or advise.
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