Interest Deductibility and Dutch Private Equity Deals: Why the EU Proposal Could Matter for Deal Structuring

Interest deductibility is often treated as a tax issue, but in Dutch private equity transactions it is also a deal implementation issue.

Rules limiting the deductibility of interest can affect acquisition financing, debt capacity, shareholder loans, management rollover, buy-and-build platforms, refinancing and the economics of Dutch acquisition structures.

According to a leaked proposal now being discussed in the market, the European Commission may seek to reduce overkill in national earnings stripping rules. The reported changes include a mandatory 30% EBITDA threshold, an increase of the safe harbour threshold from €1 million to €5 million, the exclusion of third-party loans from the limitation and an anti-procyclical mechanism where EBITDA falls significantly.

This article is not a tax analysis. The technical tax assessment belongs with tax advisers. The transaction question is more practical: what could these reported changes mean for Dutch private equity funds, acquisition financing, buy-and-build strategies, management rollover and the legal implementation of Dutch BV structures?

For Dutch PE funds, corporate finance advisers, debt advisers, tax advisers and M&A teams, this topic belongs in the wider discussion on Dutch private equity deal implementation and Dutch M&A deal practice. The issue is not only whether interest is deductible. The issue is whether the financing assumptions in the investment model can be translated into a Dutch legal structure that works commercially, legally and operationally.

Which changes are reportedly being proposed?

According to the leaked proposal, four changes could be particularly relevant for the Dutch private equity market.

First, the interest deduction cap would be set at 30% of tax EBITDA. The Netherlands currently applies a stricter threshold. A mandatory move to 30% would reduce the current disadvantage of the Dutch regime compared with several other EU jurisdictions.

Second, the safe harbour threshold would eventually increase from €1 million to €5 million, with annual indexation. This could be relevant for lower mid-market transactions, smaller platform structures and buy-and-build strategies where interest expenses can quickly exceed the current Dutch threshold.

Third, third-party loans would be excluded from the regime. This could be important for private equity transactions, because acquisition debt is often provided by banks, direct lenders, debt funds or other professional lenders. If genuine third-party debt falls outside the limitation, Dutch acquisition structures may become easier to finance.

Fourth, the rule would include an anti-procyclical mechanism. If a taxpayer’s EBITDA falls by 50% in a year, the application of the limitation would be suspended. This could matter where EBITDA temporarily drops because of market conditions, integration costs, restructuring or post-acquisition investment.

These points are tax-driven, but their consequences are broader. They may affect financing structures, bid models, debt sizing, transaction documentation, management incentive structures and post-closing reorganisations.

Why this matters for Dutch PE funds

For Dutch PE funds, the key issue is not simply whether interest is deductible. The real deal question is whether the financing assumptions in the investment model can be implemented through a Dutch structure that works in practice.

A strict interest deduction limitation can reduce debt capacity, require more equity or make a Dutch acquisition vehicle less attractive. This is not only relevant for large leveraged buyouts. It is also relevant for the Dutch mid-market, where transactions often combine acquisition debt, buy-and-build plans, management rollover, vendor financing and shareholder funding.

If the EBITDA cap moves to 30%, there may be more room within the fiscal capacity of a Dutch portfolio company or acquisition structure. That can affect the debt/equity mix, the price a fund is willing to pay and the extent to which future add-on acquisitions can be financed with debt.

If the safe harbour threshold increases to €5 million, this may be especially relevant for smaller and mid-market deals. Many Dutch PE transactions involve founder-led companies, niche platforms, healthcare businesses, software companies, business services, industrial companies and specialised B2B service providers. In those deals, a higher threshold may be the difference between a structure that is constrained from day one and a structure that has more flexibility during the first years after closing.

Third-party debt: why this matters for acquisition finance

The most deal-relevant element of the proposal may be the reported exclusion of third-party loans from the regime.

In Dutch PE transactions, acquisition debt is often provided by banks, direct lenders, debt funds or other professional lenders. That debt is different from intra-group debt used to shift profits. Yet a generic interest limitation rule can still affect external acquisition financing.

If genuine third-party debt falls outside the earnings stripping limitation, that may affect debt sizing, pricing, covenant headroom and bid competitiveness. A lender may have greater comfort that the structure is not unnecessarily penalised by a generic tax limitation. A fund may have more room to use acquisition debt without immediately modelling additional tax inefficiency.

That does not mean every deal can automatically carry more leverage. Debt capacity remains driven by cash flow, EBITDA, sector dynamics, covenant package, working capital needs and financing market conditions. But for the legal implementation of Dutch acquisition structures, the distinction between external acquisition debt and intra-group financing may become more important.

This also affects documentation. The SPA, funds flow, loan agreements, security documents, shareholder loans and post-closing restructuring steps must be aligned. The financing structure must not only be tax efficient. It must also work under Dutch governance rules, corporate benefit analysis, distribution restrictions and board approval processes.

Buy-and-build: more room, but also more need for planning

For buy-and-build platforms, a more flexible earnings stripping framework could be particularly relevant.

A platform acquisition is often followed by add-on acquisitions, integration costs, investment in management, systems upgrades and working capital pressure. EBITDA may temporarily lag behind the acquisition strategy. At the same time, debt may be needed to finance further growth.

A move to 30% EBITDA and a higher safe harbour threshold could give Dutch platform structures more room. The anti-procyclical mechanism may also be relevant if EBITDA temporarily falls because of market conditions or integration effects. Instead of adding pressure in a weaker year, the rule would be less disruptive.

For PE funds and their advisers, this does not mean that the structure should be reviewed only after the first acquisition. The opposite is true. If there is a buy-and-build thesis, the initial platform deal should already anticipate future debt, add-on acquisitions, dividend restrictions, management participation, cash pooling, intercompany balances and governance approvals.

The legal structure should not only support the first acquisition. It should also support the next three or four transactions. This connects directly with Dutch private equity deal implementation and the drafting of shareholder agreements in Dutch private company structures.

Management rollover and vendor financing

The reported changes may also be relevant for management rollover and vendor financing.

In Dutch PE deals, management often remains economically invested through a rollover vehicle. In some transactions, vendor loans, deferred consideration, earn-outs or shareholder loans are also used. These instruments are not just legal drafting points. They affect cash flow, returns, governance and exit economics.

If interest deduction limitations become less restrictive, there may be more room for structures combining debt and equity. At the same time, it remains important to distinguish clearly between external debt, shareholder loans, vendor loans and hybrid instruments. Each instrument has a different legal and tax function.

For management teams, this matters because the financing structure may influence dividend capacity, cash sweeps, exit proceeds, reserved matters and future dilution. For sellers, it may affect valuation, payment certainty and the buyer’s ability to finance growth after closing.

These issues overlap with practical questions around management rollover equity in Dutch private equity deals and hybrid capital structures in Dutch growth companies.

Why advisers should address this early

For corporate finance advisers, tax advisers, M&A lawyers and debt advisers, the main lesson is that interest deductibility should not be treated as a late-stage tax check.

If the financing is designed first and the Dutch implementation is tested only shortly before signing or closing, the structure may already be difficult to adjust. A tax assumption then becomes a legal implementation problem.

The better approach is to align tax, legal, debt advisory and corporate finance early in the process. Where is the debt placed? Which entity bears the interest expense? Is the debt external, intra-group or shareholder-funded? Which cash flows are needed for debt service? Which board approvals are required? Which points must be reflected in the SPA, shareholders’ agreement and loan documentation?

In Dutch BV structures, directors must also assess the corporate interest of the relevant company. This may be relevant where a company incurs debt, grants security or makes cash flows available for the wider acquisition structure. Distribution rules, corporate benefit, financial assistance, intra-group arrangements and decision-making should be documented properly.

Practical deal points for Dutch PE transactions

In Dutch PE transactions, interest deductibility should be addressed before the structure is locked.

The acquisition model should not assume full deductibility without checking the Dutch position. External acquisition debt, intra-group debt, shareholder loans and vendor loans may be treated differently.

The SPA should be reviewed for assumptions around debt, leakage, permitted leakage, tax liabilities, refinancing and post-closing reorganisations. If a debt push-down, refinancing or cash repatriation is expected after closing, this should fit the legal structure and transaction timetable.

The shareholders’ agreement should make clear how debt and equity funding will work after closing. This is particularly important in buy-and-build transactions, management rollover structures and investments where the fund, management and co-investors do not have the same economic position.

Board approvals should not be treated as a formality. Directors should be able to explain why the financing structure is in the interest of the relevant Dutch company, especially where the structure also supports the acquisition or the wider group.

Finally, tax and legal advice should not run on separate tracks. Interest deductibility is tax-driven, but its consequences often appear in legal documents.

A better investment climate, but not automatic simplicity

If the expected EU proposal leads to a broader and more harmonised earnings stripping framework, this could be positive for the Dutch PE market. A mandatory 30% EBITDA cap, a higher safe harbour threshold, the exclusion of third-party debt and an anti-procyclical mechanism could make Dutch acquisition structures, buy-and-build platforms and growth financings more workable.

But more flexible rules do not automatically make implementation simple. Funds and advisers will still need to decide where debt is placed, how shareholder funding is documented, how cash flows move through the structure and which governance approvals are required.

The practical lesson for Dutch PE deals is clear: interest deductibility should be considered early in the structuring phase, not as a tax footnote at the end. In leveraged buyouts, buy-and-build strategies, shareholder loan structures, management rollover and refinancing transactions, interest deductibility can influence whether the legal structure of the deal actually works.

FAQ

Is this mainly a tax development?

The proposed changes are tax-driven, but the consequences are transactional. Interest deductibility can affect acquisition financing, debt capacity, valuation, cash flow, shareholder loans, management rollover and post-closing reorganisations.

Why is this relevant for Dutch PE funds?

Dutch PE funds often use debt in acquisition structures. If the EBITDA threshold becomes more generous, the safe harbour increases and third-party debt falls outside the limitation, Dutch acquisitions may become easier to finance.

What does the increase of the safe harbour threshold to €5 million mean?

For lower mid-market deals and smaller platform structures, a higher threshold may provide more room before interest deduction limitations become restrictive. This can matter where interest expenses are high relative to EBITDA.

Why is the third-party debt exclusion important?

Much acquisition debt in PE transactions is provided by banks or debt funds. If genuine third-party debt falls outside the limitation, this may improve financing capacity, debt sizing and covenant headroom in Dutch acquisition structures.

What does the anti-procyclical mechanism mean?

If EBITDA falls by 50% and the limitation is suspended, the rule would be less likely to add pressure in a difficult year. This could matter in periods of integration costs, restructuring, market decline or temporary EBITDA pressure after closing.

Should this be reflected in the SPA?

Often yes. The SPA may include assumptions around debt, leakage, permitted leakage, tax liabilities, refinancing and post-closing reorganisations. If those assumptions do not match the financing structure, disputes may arise later.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and M&A lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, investors, private equity funds, management teams and international companies on Dutch M&A transactions, private equity structures, shareholder arrangements, governance and cross-border deal implementation.

Structuring a Dutch PE transaction, buy-and-build platform or acquisition financing?

Interest deductibility is tax-driven, but in practice it can affect acquisition financing, shareholder loans, management rollover, buy-and-build structures and Dutch BV governance. These points should be reviewed before the structure and transaction documents are locked.

Dirk de Waard advises private equity funds, investors, founders and management teams on Dutch M&A, private equity transactions, shareholder structures and deal implementation. Contact Dirk at dirk.dewaard@viottalaw.com to discuss the Dutch legal implementation of an acquisition, investment or financing structure.