As of 1 January 2019, companies preparing their financial statements in accordance with the International Financial Reporting Standards (IFRS) need to apply IFRS 16. On 4 April 2019, the Dutch State Secretary of Finance issued a letter in which he published his view on the impact of IFRS 16 on Dutch tax law. In this tax alert, we will discuss his main considerations.
The main accounting consequences of IFRS 16
Under IFRS 16, companies that apply IFRS are obliged to recognize assets and liabilities on their balance sheet for all rents and leases with a term of 12 months or more, unless the underlying asset is of low value. This treatment is regardless of whether we speak of an operational lease or a finance lease. This is different from the treatment prior to 1 January 2019, when this treatment was only required in the case of finance lease.
As a result of this development, the lessee should recognize the economic right of use of a leasing object and the corresponding lease liabilities (representing the obligation to pay rentals) on its balance sheet against net present value. During the term of the lease, the lessee should depreciate its right of use and recognize interest costs as a result of the use of the net present value. As a result, IFRS 16 replaces lease expenses in the income statement by depreciation and interest expenses. This treatment would generally result in a shift of the timing of leasing costs, while the interest on the net present value is higher at the beginning of a lease than in the later years. As such, IFRS 16 will impact both the profit and loss account and the balance sheet of the lessee in case of operational lease.
Dutch tax consequences of IFRS 16
Accounting principles can be followed for Dutch tax purposes, unless the accounting principles are not in line with Dutch tax law or the general Dutch sound business practice ("goedkoopmansgebruik").
In his letter of 4 April 2019, the Dutch State Secretary of Finance informed the Dutch parliament of his view on the Dutch tax consequences of IFRS 16. His main considerations were the following:
- IFRS 16 is not in accordance with Dutch sound business practices and can, therefore, not be followed for Dutch tax purposes. According to the Dutch State Secretary of Finance, IFRS 16 is not in line with the matching principle, due to the fact that costs are de facto brought forward.
- The Dutch State Secretary of Finance argues that the depreciation of the lease obligation for accountancy purposes should not be followed for Dutch tax purposes. As a result, IFRS 16 should not impact the calculation of the EBITDA for Dutch tax purposes.
- The Dutch State Secretary of Finance also explicitly confirmed that the interest component in relation to operational leases should not qualify as an interest expense for the purpose of the earnings stripping rule and should be deductible for Dutch tax purposes.
The view of the Dutch State Secretary of Finance under the first two bullet points deviates from the general view in Dutch literature, where it is argued that IFRS 16 is in accordance with Dutch sound business practices. Although the published views of the Dutch State Secretary of Finance are not binding law, these should be interpreted as the general policy rules on this matter of the Dutch tax authorities. Not applying their policy may result in questions from the Dutch tax authorities.
Baker McKenzie continues to monitor the developments in relation to IFRS 16 and will keep you informed on this matter. If you have any questions about the consequences of IFRS 16 on your tax position and tax deviations from your commercial accounts, please do not hesitate to reach out to your contact at Baker McKenzie Amsterdam.