Sander.Michael@borgentax.nl

The Dutch Tax Authorities' Knowledge Group recently published its view on how capitalized returns on cumulative preferred shares should be treated for purposes of the Dutch lucrative interest regime.

 

According to the Knowledge Group, preferred returns that are not paid out but instead added to the cumulative preferred share capital should be treated as additional contributed capital. This may affect the ratio between ordinary shares and preferred shareholder financing, which is relevant when determining whether a lucrative interest exists.

 

This means that a management participation that initially did not qualify as a lucrative interest may do so later if the capital structure changes over time.

 

The Knowledge Group also confirms that the analysis should be based on contributed capital rather than the economic value of the shares. Consequently, increases in the value of the ordinary shares are not relevant when assessing the applicable ratio.

 

This treatment only applies where accrued returns are effectively added to the cumulative preferred share capital and themselves participate in future preferred returns. Amounts recorded merely as an outstanding receivable, dividend reserve or similar claim that do not generate future preferred returns generally fall outside the shareholder financing test, based on the Knowledge Group’s interpretation.

 

 

Management incentive structures are often assessed only when implemented. However, the analysis should not stop there.

 

Where preferred returns are capitalized, the relevant ratio may gradually shift over time. This could result in a lucrative interest position arising at a later stage, even without additional shareholder contributions or changes to the investment structure.

 

The key takeaway is that the ratio between ordinary shares and cumulative preferred shares should be monitored throughout the life of an investment, not just at inception.