Tax-deductible expenses; mixed expenses

The basic principle of the determination of the profits is that all expenses associated with business operations are tax-deductible. If an expense can be regarded as commercially sound then its value is not of importance. However, the deductibility of certain business expenses is subject to restrictions. This concerns mixed expenses, which are business expenses with a private element. Non-deductible expenses include costs connected with pleasure craft used for entertainment purposes and fines. The limitations on deductibility of expenses are more strict for companies with one or more natural persons holding a substantial interest in the company, who also work(s) for the company. Basically, a natural person has a substantial interest if he holds 5% or more (direct or indirect) of the share- capital of the company. In that case 10% of the company's costs in connection with food, drinks, tobacco, representation including receptions and entertainment, seminars, excursions etc., are not deductible. The company can opt for a fixed amount of NLG 3,200 per substantial interest holder, who also works for the company, to be treated as non-deductible. The Corporation Tax Act gives an inexhaustive list of deductible and non-deductible expenses. The following expenses are always deductible: ? profit shares paid to directors and other staff as remuneration for employment; ? profit shares paid to creditors other than founders, shareholders or other persons entitled to shares in the corporation; ? profit shares paid in connection with licences, patents, etc., to persons other than founders, shareholders or persons otherwise entitled to shares in the corporation; ? profit shares paid by an insurance company to its policyholders; ? the costs of incorporation and of alterations in the capital. In the Netherlands no thin capitalization rules exist. Since January 1997 limitations on the deductibility of intercompany interest expenses have been introduced in the Corporate Income Tax Act. The (interest) expenses on intercompany loans are not deductible in basically two types of situations: (interest) expenses arising from indebtness in the shareholder/susidiary relation, e.g. in connection with dividends, reduction of capital and capital contributions. However, (interest) expenses remain deductible, if the tax payer can demonstrate that both the transaction and the loan were entered into for sound business reasons; (interest) expenses related to artificial conversion of equity into debt within the group. However, expenses related to these schemes remain deductible, if the tax payer can demonstrate that either both the transaction and the loan were entered into for sound business reasons or that the interest paid is effectively subject to a reasonable level of profits tax in the hands of the recipient. The following expenses are never deductible: ? profit distributions other than those specifically designated as deductible in the Corporation Tax Act (see above); ? corporation tax, dividend tax and tax on games of chance.