Corporations should avoid discussing recharacterisation with tax authorities but should instead determine the level of debt from a transfer pricing perspective, according to speakers at ITR’s Global TP Forum Europe in Amsterdam last Wednesday, September 28.
“The debate is on legal questions – whether you recharacterise the debt as equity,” said Kerim Keser, managing director at consulting firm Kroll in Munich. “For TP rules, there it is much stricter, but we do see a lot of cases where tax authorities take that discussion of debt into equity.”
“The problem is we miss the discussion as to whether the debt is too large for the company. The authorities can disregard the whole transaction, so it’s better to be prepared to see the level of debt from a TP perspective,” he added.
Keser said tax authorities could also choose to recharacterise only certain elements of a transaction, meaning it is better for taxpayers to avoid these discussions overall.
Dutch decree
One jurisdiction that has attempted to bring further guidance around the risk of recharacterisation is the Netherlands.
In July this year, the Dutch state secretary of finance Marnix van Rij released a TP decree which offered taxpayers more clarity around inter-company loans and financial intermediaries.
The decree aligns the Netherlands’ TP regime with OECD guidelines and, among others, provides guidance on intermediate financial services companies, especially in relation to the remuneration of multinational enterprises (MNEs).
The state secretary also provided more details on cash pools – which are often used by MNEs to lower interest rates and administrative costs.
Despite the decree, corporations remain at risk of seeing their transactions being recharacterised, according to Larry van den Hof, TP coordination group member for taxes and large enterprises at the Dutch Ministry of Finance.
“The Ministry of Finance released a note on TP issues – in which part of the note said that we could recharacterise a loan as equity. However, the tax authorities have not yet managed to find an example where the high court approved to recharacterise loan as equity,” he said.
“The question is whether we will see many more cases given the interest deduction limitation rules since 2019 of 30% of EBITDA, and since 2022 of 20% of EBITDA,” added van den Hof.
As for cash pools, he said the tax authority “always” looks at the position of Dutch companies participating in cash pools.
“We do see positions that remain a long time positive or negative,” he explained. “For positive cash pool positions that have the character of a long-term loan, we want to check whether the interest paid is adequate. That’s why we start our enquiries if we see those positions.”
As corporations are not putting money in a bank but in another company instead, the rate should be higher than the deposit rate of a bank based on the difference in rating.
For big companies in particular, large sums of money go through cash pooling, according to van den Hof.
“We would like to see the explanation of what the costs are, what the risks are of the cash pool leader,” he concluded.
