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On May 13 draft legislation was put forward to Dutch Parliament by the Ministry of
Finance, in which a remarkable change is proposed regarding the taxation of carried
interest schemes. These schemes are referred to as “lucrative interests” throughout
the draft legislation, which terminology is used in this note.

Based on this proposed legislation,        EUR 99 million and from the second       An example
any income out of a lucrative interest     class EUR 1 million has been placed      InvestCo has two classes of share.
will be taxed to income tax at the         with the private equity firm. Top        The first class is entitled to 30 percent
moment of actual receipt of the            management of the private equity         cumulative preferential dividend per
income by the participant at a rate of     firm and (the group of) InvestCo         year. The second class is
52 percent. The income is not              (“Top Management”) holds in total        subordinated to the first class, but is
classified as income from                  20 percent of the second class of        entitled to the surplus profit. From the
employment, but as income from             shares, which required an investment     first class EUR 86 million has been
other activities. The reason for this is   of EUR 200,000. The other 80             placed with the private equity firm
that in practice it is not only            percent of the second class of shares    and EUR 4 million with Top
employees who participate in carried       is held by the private equity firm.      Management. From the second class
interest schemes.                                                                   EUR 10 million has been placed with
                                           InvestCo makes no dividend               the private equity firm. Top
To be a lucrative interest, the interest   distribution in the first year and a     Management has financed its shares
must be issued as a reward for labour      dividend distribution of EUR 40          as to 90 percent with a 5 percent
activities of the holder of such           million in the second year. Given the    interest bearing loan provided for by
interest. Such holder can be a person      above, the first class of shares is      the private equity firm.
involved with a private equity firm or     entitled to a dividend of EUR 19.8
a manager or employee who receives         million for these first two years and    InvestCo makes no dividend
such interest in order to incentivise      the second class of shares is entitled   distribution in the first year and a
him to achieve certain targets.            to a dividend of EUR 20.2 million, of    dividend distribution of EUR 36
                                           which 20 percent is paid to Top          million in the second year. The first
The lucrative interest can take one of     Management. The investment of Top        class of share is entitled to the full
four forms.                                Management of EUR 200,000                dividend distribution. Top
                                           therefore yields EUR 4,040,000 in the    Management is entitled to part of this
1.        The first form concerns          second year. This EUR 4,040,000 is       dividend, being EUR 1.6 million
shares of a certain class that are         taxable income for Top Management        (4/90 of EUR 36 million). Interest
subordinated to other classes of           and is taxed at 52 percent. If wages     paid by Top Management amounts to
shares and the subordinated class          tax has already been levied at the       EUR 360.000 over the first two years.
accounts for no more than 10 percent       moment of placing the shares, this       Their investment of EUR 400,000
of the total share capital.                will be taken into account.              yields net EUR 1,240,000 in the
                                                                                    second year. This EUR 1,240,000 is
An example                                 2.        The second form concerns       taxable income for Top Management
An acquisition vehicle (“InvestCo”)        shares of a certain class that are       and is taxed at 52 percent.
has two classes of share. The first        entitled to a preferential dividend of
class is entitled to 10 percent            at least 15 percent per year.            3.        The third form concerns
cumulative preferential dividend. The                                               profit sharing loans of which the yield
second class is subordinated to the                                                 is to some extent dependent (at least
first class, but is entitled to the                                                 15 percent) on the realization of
surplus profit. From the first class                                                management - or shareholder-targets,
such as profit, turn-over, cost                 Indirectly held lucrative interests        be valued on the opening balance
reductions, acquisition of additional           It does not make any difference in         sheet that is used to determine the
finance sources, etc.                           determining whether or not there is a      taxable income derived from this
                                                lucrative interest whether this interest   interest. Valuation takes place at
An example                                      is held directly or indirectly, for        historical cost price plus any tax that
Top management of (the group of)                example through a company in which         was levied in connection with
InvestCo holds a receivable on (a               the manager holds an interest of at        obtaining the interest.
holding company of) the private                 least 5 percent. However, if such a
equity firm. Profit-dependent interest          company immediately distributes any        Commencing date
is paid on the receivable that can              profits (that remain after corporate tax   It is proposed that the new legislation
reach up to 40 percent per year. The            (rate of 25.5 percent)) to the manager,    will be in place by January 1, 2009.
interest is taxable income for top              such dividend distributions are taxed
management of (the group of)                    at 25 percent and not 52 percent,          Further questions
InvestCo and is taxed at 52 percent,            resulting in an effective combined tax     For any further questions please
assuming that the underlying                    burden of just over 44 percent.            contact our Tax Partners Roderik
intention of this scheme is to reward                                                      Bouwman and Boris Emmerig or our
the top management for its efforts.             Non-resident tax payers                    Corporate Partners Richard Fens and
                                                For non-resident tax payers the            Barbara van Hussen. Their contact
4.        The fourth and final form of          income out of a lucrative interest is      details are as follows.
lucrative interest concerns property            considered to be Dutch taxable
rights that economically resemble or            income for the purposes of the Dutch       Tax
are comparable to the above                     Income Tax Act. The draft legislation      Roderik Bouwman
mentioned shares or receivables or              is not explicit with respect to the        T: +31 20 541 96 72
other rights of which the value is to           application of tax treaties in this
some extent dependent from the                  respect. The fact that lucrative
realization of management targets or            interests are meant as a reward for        Boris Emmerig
shareholder targets. Good leaver/bad            activities carried out in the              T: +31 20 541 96 41
leaver regulations in employment                Netherlands does not             
agreements, as well as ratchets,                necessarily mean that the relevant
reverse ratchets and dilution shares            treaty would allocate the right to levy    Corporate
may fall within the scope of this               tax to the Netherlands and not to the      Richard Fens
category. Any income out this fourth            country of residence. This is              T: +31 20 541 99 02
form is taxed to income tax at a rate           something that needs to be sorted out
52 percent.                                     in the specific cases.
                                                                                           Barbara van Hussen
Administrative obligations                      Existing carried interest schemes          T: +31 20 541 98 62
Holders of a lucrative interest need to         The draft legislation stipulates that
keep a balance sheet on which their             existing carried interest schemes can
lucrative interest is initially placed          fall within the scope of the
showing its historical cost price plus          regulations for lucrative interests as
any tax that was levied in connection           of January 1, 2009, and there are no
with obtaining the lucrative interest.          grandfather rules available. The
                                                existing carried interest will need to

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