Debt qualification of Perpetuals

The Dutch Supreme Court ruled that Fixed-to-Floating Perpetual Securities are treated as debt for Dutch tax purposes. The ruling confirms the clear rules around the qualification of debt, as formulated in earlier case law.

The Supreme Court repeats the following general rules:
– An instrument that does not qualify as capital based on civil laws, is qualified as debt for tax purposes if there is a repayment obligation.
– A loan is only treated as equity in three cases, one of which is the “participating loan”, which has the following equity-like features: 1) profit dependent interest, 2) a lower ranking than regular creditors and 3) absence of a fixed term. These elements should be tested based on the agreement (i.e. based on legal standards, rejecting a determination in fact).

The perpetual had a repayment obligation despite the absence of a repayment date and the ranking equal to a preferred shareholder. The instrument further was not profit dependent (element 1) despite the ability to suspend interest payments based on a paripassu-clause. Hence, the perpetual qualifies as debt and interest expenses are (in principle) tax deductible.

Christiaan Oudemans

Gerard van der Linden

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