Outline of corporate income tax and withholding tax measures

Outline of corporate income tax and withholding tax measures

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Changes to mutual funds and exempt investment institutions

Background
A separate bill proposes to amend the definition of a mutual fund (MF) and the conditions for exempt investment institutions. A similar proposal was previously submitted for consultation. As a result, the effective date of the Act was postponed by one year, to 1 January 2025. The bill also contains transitional law that will take effect from 1 January 2024. This will give taxpayers time to adjust existing structures.

Open-ended mutual funds
Open-ended mutual funds (MFs) are subject to corporate income tax to bring about equal tax treatment of open-ended investment funds without a specific legal form and investment companies which are public limited liability companies (NVs). Under the current legislation, an open MF exists if the certificates of participation are negotiable; the so-called consent requirement. The consent requirement is met if the alienation of a participation does not require the consent of all participants. If this requirement is not met, there is a closed-end MF, which is transparent for tax purposes. In that case, the results from the investments are taxed directly at the level of the participants.

The current qualification of an open-ended MF has two bottlenecks in particular:

1. The consent requirement as the decisive criterion for the fund’s tax liability is uncommon in an international context. This may lead to differences in qualification, resulting in double taxation or double non-taxation.
   
2. The actual use of an MF is not in line with the objective of independent tax liability for MFs. Currently, most MFs are not open-ended investment funds, as originally intended, but family funds. In addition, MFs are mostly used as anonymisation arrangements for wealthy individuals, since MFs are not obliged to file their annual accounts.

To remove the above bottlenecks, the government now proposes to align the definition of MF (Fonds voor Gemene Rekening) with the concepts of ‘investment fund’ (beleggingsfonds) and ‘fund for collective investment in transferable securities’ (fonds voor collectieve belegging in effecten) under the Financial Supervision Act (Wet financieel toezicht, Wft) from 1 January 2025. The effect of this measure is that family funds will no longer easily qualify as open-ended MFs.

Transitional law
In some situations, changing the definition of MF will result in termination of corporate income tax liability. From a civil law perspective, the transition to tax transparency does not result in a transfer of assets. To prevent profits from remaining untaxed as a result of this, a fiction is introduced that brings about the transfer of all assets at fair value. This means that an MF that is no longer liable to corporate income tax will be subject to a final settlement on its goodwill, hidden reserves and reserves for tax purposes. To mitigate this direct taxation, the bill’s transitional law offers three options:

1. Roll-over relief scheme
The roll-over relief scheme means that the tax base of an MF can be rolled over to the underlying participants. A condition for application of this facility is that all participants are or become resident or non-resident taxpayers for Dutch corporate income tax purposes.

2. Share-for-share merger
A share-for-share merger facility can be applied if a participant’s certificate of participation in an MF is taxed in box 1 or box 2 for income tax purposes or for corporate income tax purposes. A share-for-share merger can be effected by depositing the certificate of participation into an existing or new capital company, against issue of shares or as share premium. No tax is payable on the gain on the disposal of the certificate of participation at that time. The share-for-share merger can also be combined with the roll-over relief scheme by first effecting a share-for-share merger and then invoking the roll-over relief scheme with the remaining participants.

In the event that the assets of an MF include immovable property and the share-for-share merger facility is applied, transfer tax may be due. The bill contains a transfer tax exemption for that situation. However, this exemption does not apply to MFs that are set up after Budget Day 2023 (19 September 2023, 15:15h) or if participants join and contribute immovable property only after Budget Day.

3. Payment facility
If an MF is able to demonstrate that the roll-over relief scheme cannot be applied, provided certain conditions are met, it is offered the possibility to pay the tax due in instalments over a period of up to 10 years.

Exempt investment institutions
An exempt investment institution (EII) (vrijgestelde beleggingsinstelling, vbi) is subjectively exempt from corporate income tax and has no dividend withholding tax obligation. The EII regime aims to facilitate collective investment by avoiding additional taxation at the level of the investment institution compared to direct investment. The proposed amendment is to align with the definition of ‘investment institution’ or ‘UCITS’ under the Financial Supervision Act for the purposes of the EII regime. This removes the possibility under current law to use the EII regime when investing in private assets. Research has shown that many EIIs are used by wealthy individuals and families, a purpose for which this tax regime was not intended.

Property measure for fiscal investment institutions

The government proposes to amend the regime for fiscal investment institutions (FIIs) (fiscale beleggingsinstelling, fbi) with effect from 1 January 2025. Unlike an EII, an FII is subject to corporate income tax, but its profits are taxed at a rate of 0%. However, FIIs must distribute their profits to their participants annually, so they can be taxed for the investment result. Moreover, 15% dividend withholding tax is withheld on this profit distribution.

The proposal is to no longer allow FIIs to invest directly in Dutch property. If they do, their special tax status will lapse, and the entities will become regular taxpayers. However, FIIs are allowed to hold shares in a subsidiary that owns property located in the Netherlands and is subject to regular tax liability. Contrary to what is stated in the consultation bill, FIIs will still be allowed to invest in foreign property.

The rationale behind this measure is the ‘property leak’ that may arise under the current regime if the participant(s) of an FII is (are) established in a treaty country. This is because most tax treaties allow the Netherlands to withhold little or no dividend withholding tax on a dividend paid by an FII to an entity in the other treaty country. A similar problem may arise if a foreign based FII holds Dutch property. The property leak would prevent the Netherlands from levying tax on the income from the property, even though treaties have always assigned the right to levy tax on the Dutch property to the Netherlands.

This risk does not apply to property located abroad, as the Netherlands has no taxing rights in respect of foreign property anyway. Contrary to what was proposed in the consultation bill, the financing requirement will not be adjusted, as investing in foreign property remains possible. For direct investments in foreign property, the requirement remains that debt financing may not exceed 60% of the carrying value of the property. For other investments, debt financing must be limited to no more than 20% of the carrying value of the investments.

The measures will not take effect until 1 January 2025, so as to give FIIs investing in Dutch property time to restructure. By way of transitional law, in 2024 a temporary exemption in transfer tax will apply to property FIIs that will lose their status as a result of the legislative change. To continue investing in a tax-neutral manner, they can, for example, transfer the Dutch property to a tax-transparent entity. Depending on the situation, such a transfer may lead to the imposition of transfer tax. The temporary exemption ensures that no tax is levied in such cases. To prevent the exemption from being used for other restructuring operations as well, it explicitly only applies to the acquisition of the beneficial ownership of the property.

New qualification policy for legal forms

Core
A separate bill will amend the Dutch qualification policy for legal forms. An important part of the bill is the abolition of the tax liability of Dutch limited partnerships whose participations are freely transferable (Dutch open limited partnerships, open CVs) (open commanditaire vennootschappen). The so-called consent requirement (a limited partnership is open if transfer of the participations is possible without the consent of all partners) is uncommon in an international context, which may cause qualification differences in cross-border situations. Although the hybrid mismatch measures following from the ATAD2 Directive already address any double taxation resulting from such qualification differences, this bill also removes the cause of this type of hybrid mismatches.

Besides abolishing the independent tax liability of open CVs - and foreign legal forms similar to open CVs - the Dutch qualification policy for foreign legal forms will be enshrined in law. Like under current law, the main rule is a comparative method for legal forms. This means that a comparison is made based on certain civil law characteristics of Dutch legal forms for qualification of an entity incorporated under foreign law. For cases where this comparative method does not provide a solution, two additional methods are proposed for the qualification of foreign legal forms: the fixed method for Netherlands-based entities and the symmetrical method for foreign-based entities that receive income from the Netherlands.

Below, we first discuss the codification of the Dutch qualification policy and then elaborate on abolition of the tax liability for open CVs and the corresponding transitional law.

Codification of Dutch qualification policy
The qualification of a foreign entity for Dutch tax purposes takes place on the basis of the comparative method for legal forms. A foreign entity is treated similarly for tax purposes as a Dutch entity with a comparable legal form. Under the proposed law, this method will be retained as the main rule for income tax, corporate income tax, dividend withholding tax and the conditional withholding tax. A decree will provide a framework for assessing when a foreign entity has a legal form comparable in nature and structure to that of an entity incorporated under Dutch law.

For foreign legal forms similar in nature and structure to Dutch open CVs, the comparative method for legal forms will lead to a different outcome than under current law. By abolishing the tax liability of open CVs, comparable foreign entities will be transparent for Dutch tax purposes, just like Dutch open CVs. The fact that CV-like entities are not independently taxable under the proposed law is further evidenced by the omission of the phrase "and other companies whose capital is wholly or partly divided into shares" from articles 2 and 3 of the Dutch 1969 Corporate Income Tax Act (Wet Vpb 1969). In comparison with the consultation bill, omitting this sentence clarifies that partnerships whose capital is divided into shares are also transparent under the proposed law.

While the comparative method for legal forms is sufficient for most qualification issues, it does not provide a solution in all cases. Two additional qualification methods are proposed for situations where the legal form of a foreign entity is not comparable to that of an entity incorporated under Dutch law.

• For foreign entities established in the Netherlands, the so-called ‘fixed method’ will apply: if the entity is not comparable to a Dutch entity, it will be classified as independent (non-tax transparent).
• Foreign entities that are not resident in the Netherlands but do receive Dutch income are qualified as non-tax transparent under the ‘symmetrical method’ if they are also non-tax transparent in their state of residence. This only applies if the entity is actually considered resident in that state. This is a change from the consultation bill, which followed the qualification of the state of incorporation. Foreign entities without a comparable Dutch legal form that are not considered independently liable for tax under the symmetrical method are therefore considered transparent for Dutch tax purposes.

Cancellation of the independent tax liability of Dutch open CVs
Under current Dutch qualification policy, an open CCV is treated as non-tax transparent if the limited partners’ participations are transferable without requiring the consent of all partners. This tax liability applies only to the limited partners. Profits accruing to the general partners are taxed directly at the level of the general partners. The government proposes to drop the consent requirement and thus the independent tax liability of open CVs. This will make all (open and closed) CVs, and similar foreign legal forms, fully transparent for Dutch tax purposes. The proposal is intended to take effect from 1 January 2025.

For income tax and corporate income tax purposes, consequences will be attached to CVs becoming transparent. Although CVs do not cease to exist under civil law as they become transparent, the proposed transitional law regulates by fiction that they are deemed to have transferred their assets to the partners at fair market value immediately prior to their tax transparency. In addition, open CVs are deemed to have ceased to receive taxable profits in the Netherlands at the same time. The effect of this transfer and cessation fiction is that open CVs are subject to mandatory final corporate income tax settlement of the profits attributable to them.

In addition, after an CV has become transparent, the limited partners no longer hold a share in it. The proposed transitional law therefore provides that a limited partner is deemed to have disposed of their share in the CV at fair value at the time immediately preceding the termination of an CV’s tax liability. For limited partners’ interests not covered by the participation exemption, this generally results in taxation, as in the case of individuals holding a substantial interest in an open CV. Finally, limited partners and the persons associated with them are subject to a notional disposal in box 1 for income tax purposes, relating to assets they have made available to the open CV.

Under certain conditions, it is possible to avoid or defer acute taxation following from cancellation of an CVs’ tax liability. The proposed transitional law provides for four facilities that can be used in 2024:

1. Roll-over relief scheme: the tax claim pertaining to the business of the limited partnership is transferred to the limited partners who are liable to corporate income tax. This facility can only be used if all limited partners are non-tax transparent (or become non-tax transparent under this bill) and are actually subject to corporate income tax. The limited partners take over the assets of the limited partnership at the same carrying value on their tax balance sheet.
   
2. Share-for-share merger: limited partners can roll over the tax claim on their share in an CV to a (new or existing) holding company by depositing their share in the CV into the shares in a holding company. No income tax is due on the gain on the disposal of the share, provided the partner recognises the interest acquired in the holding company at the same value as their share in the open CV. In this context, an exemption from transfer tax also applies, provided that it is an CV that already existed on Budget Day 2023 (19 September 2023, 15:15h) and the property is not subsequently contributed by a new limited partner.
3. Roll-over relief scheme in disposal situations: limited partners can roll over the tax claim on the asset made available to the open limited partnership if the asset is actually used unchanged in the business from which the limited partner will receive business profits.
4. Payment by instalments in up to 10 years, if it is not possible for open CVs to use the roll over relief scheme.

Measures to strengthen the approach to combat dividend stripping

The government proposes to introduce a number of measures to strengthen the approach to combat dividend stripping. The term ‘dividend stripping’ is defined as reducing Dutch dividend withholding tax by entering into a combination of transactions, without which there would be no entitlement to dividend withholding tax relief. The measures affect income tax, corporate income tax and dividend withholding tax.

The burden of proof will be adjusted with regard to the identification of the beneficial owner of the proceeds. Under current law, it is up to the Tax Inspector to prove plausibly that a beneficiary is not the beneficial owner of the income. Under the proposed amendments, this initial burden of proof shifts to the person claiming relief. This person will then not only have to state the facts and, in case of dispute by the Tax Inspector, demonstrate that they are entitled to the relief, but will also have to do the same to demonstrate that they are the beneficial owner. It is further proposed that, in respect of listed shares, it should be registered who is entitled to a credit, exemption or refund of dividend withholding tax withheld on a certain reference date (the record date), in order to promote legal certainty.

To avoid overburdening investors, particularly those who have small investment portfolios, an efficiency margin is introduced for certain situations. This margin implies that, starting from an amount exceeding EUR 1,000 of dividend withholding tax levied per financial or calendar year, a beneficiary must make it plausible that they are the beneficial owner. On top of that, the bill further clarifies the concept of ‘combination of transactions in affiliated relations’ by specifying which parties can form part of the combination of transactions.

The intended effective date is 1 January 2024, with the understanding that the amendments to the Corporate Income Tax Act will come into force with effect from financial years starting on or after 1 January 2024.

Pillar 2 related changes

By memorandum of amendment, some provisions relating to the Minimum Tax Act (MTA) 2024 have been amended. One of the amendments lays down by law that a minimum tax as referred to in article 1.1 MTA 2024 is not deductible from profits for corporate income tax purposes (article 10 CITA 1969). Furthermore, a qualifying domestic top-up tax levied from a CFC may be used to credit the tax levied on the income of that CFC pursuant to article 13ab of the CITA 1969. This is to avoid economic double taxation.

Corporate income tax deduction for gifts

The government had proposed abolishing the gift deduction for corporate income tax purposes effective from 1 January 2024. This measure will not go ahead, so non-business donations will continue to be deductible up to a maximum of 50% of profits, capped at EUR 100,000. On top of this, gifts by a company that also serve a personal charitable need of the shareholder will no longer be taxed as a distribution of profits in box 2 or regarded as proceeds for dividend tax purposes, not even if they exceed the limits of the current gift deduction. On the other hand, the limit for excessive borrowing from one’s own company by substantial interest holders (box 2) is reduced from EUR 700,000 to EUR 500,000. In excess of that, a notional profit distribution in box 2 will be taken into account.

Roll-over relief scheme on dissolution of a company

The statutory provision on conversion of a private or public limited liability company without tax consequences contains a regulation concerning losses to be rolled over from corporate income tax to income tax. Any remaining corporate income tax losses after set-off against the profits on dissolution of the company can, under certain conditions, be rolled over to the shareholder(s) who continue the company as entrepreneurs for income tax purposes, applying a certain fraction (the ‘ratio’). The government proposes to replace the ratio in this statutory provision with a formula. This would automatically align the ratio with future rate changes (if any) in income tax and corporate income tax, and would not require a legislative amendment each time.

Bank tax increase

The bank tax will be increased in 2024. The rate on the part of the taxable amount relating to short-term debt will be up from 0.044% to 0.058%, while the rate on the part of the taxable amount relating to long-term debt will be increased from 0.022% to 0.029%. This should generate EUR 150 million in tax revenues.

Repurchase facility for dividend withholding tax purposes

The share repurchase facility for quoted companies (article 4c Dividend Withholding Tax Act 1965) will be abolished effective from 1 January 2025. As a result, repurchase of own shares will henceforth be taxed as heavily as dividend payments. The abolition of this facility serves as budgetary cover for various income support measures, such as an increase of the minimum wage.