Introduction

On 21 September 2021, the Dutch government presented the 2022 Tax Plan to the House of Representatives. Deloitte has issued a publication in which the legislative proposals are described.

Once these proposals are (substantively) enacted, accounting for the income tax effects may present significant challenges for some entities. These could arise in determining how an aspect of the measure applies to the entity’s specific facts and circumstances, in gathering data to quantify that application or a combination of the two.

This publication provides an overview of the legislative proposals relating to Dutch corporate income tax and dividend withholding tax and highlights the income tax reporting effects of these legislative proposals.

Additionally, an overview of several legislation and the income tax reporting effects that were included in the 2021 Tax Plan (and subsequently enacted in and / or applicable as of FY21) are included as well.

2022 Tax plan

Transfer pricing mismatches

Background

This proposal aims to combat avoidance of (Dutch) corporate income tax through international interpretation differences on the arm’s length principle; also called transfer pricing mismatches. The intention is to introduce new provisions in the Dutch corporate income tax act (DCITA) effective for financial years starting on or after 1 January 2022. These provisions no longer allow a downward adjustments in situations where another state does not impose a corresponding upward adjustment.

Situations of a transfer pricing mismatch under the proposal may also arise in
situations of double deduction. The proposal includes also specific rules to address structures with (reverse) hybrid entities.

No corresponding upward adjustment

Under the current legislation, Dutch tax payers are entitled to report an arm’s length downward adjustment, irrespective of whether a corresponding (interest) revenue is taken into account at the level of the (foreign) entity.

The proposed legislation proposes to allow a downward Dutch transfer pricing adjustments to the extent that the foreign entity includes corresponding upward transfer pricing adjustment in its tax base. It is irrelevant whether the deemed interest revenue in the end is effectively taxed as long as the jurisdiction of the foreign entity is not a jurisdiction without a profit-based tax.

Step-up value asset transfer

In case an asset is transferred (by purchase, contribution and/or distribution) within the group, the Dutch entity would in principle be entitled to value the asset at fair market value for DCITA purposes. If, however, the transferring entity would only take into account a lower value than the fair market value of the asset in its tax base, the book value for Dutch corporate income tax purposes in principle is limited to the value that is taken into account at the level of the transferor.

For the purpose of this rule, ‘assets’ may include both operational business assets as well as receivables. A similar rule is provided for debts.

Implementation and transitional law

As mentioned, it is intended to introduce the new legal provisions for financial years starting on or after January 1, 2022. Only in relation to the limitation of the depreciation/amortization base, the rules can, under certain conditions, have retroactive effect to such transfers executed in the financial year starting on or after July 1, 2019.

Tax accounting impact

• Not allowing the downward adjustment could result in a higher taxable income (or less taxable loss). This has an impact on the current tax position (or deferred tax position for tax losses carry forward).
• Not allowing the step-up in value for tax purposes and / or adjusting the depreciable tax basis (in the event of retroactive effect) could impact the tax base of the respective transferred asset. As such, to calculate the correct deferred tax position, an assessment should be performed to determine the tax base. Depending on the outcome, the effective tax rate (ETR) could be affected.
• Note that if substantively enacted before year-end, companies may have to reflect the potential impact of this legislation already in the 31 December 2021 financial statements.

Tax liability for Dutch reverse hybrid entities

Background

The proposal details changes into the DCITA, the Dutch dividend withholding tax act 1965 (DDWTA) as well as the Dutch conditional interest and royalty withholding tax act 2021 (DCWHTA).

Changes to the DCITA

Already due to the Dutch implementation of ATAD2, specific rules relating to the tax liability of Dutch reverse hybrid entities as of 1 January 2022 were adopted. In the proposal these ‘specific’ rules are reversed and replaced by similar new rules. As a result of application of the proposed rules, a reverse hybrid entity would become fully subject to tax in the Netherlands, irrespective whether or not there is a causal link between the non-inclusion and the hybrid mismatch. In order to avoid double taxation, a deduction rule would apply for profits attributable to investors that treat the Dutch reverse hybrid entity as transparent provided the profits are included in a profit based tax in line with the definition used for the other ATAD2 provisions. As a result, the reverse hybrid entity would become subject to tax insofar the income of the entity is not taxed at the level of the investors.

Due to the full tax liability, reverse hybrid entities are considered to be residents of the Netherlands, as a result of which these reverse hybrid entities will also qualify as treaty residents. If applied, payments made by a Dutch taxpayer to that reverse hybrid entity would no longer fall within the scope of the ‘specific’ anti-hybrid rules.

Tax accounting impact

As a result of the tax residence in the Netherlands (change in tax status), opening balance as per January 1, 2022 should be determined. This also entails determining tax basis for its assets and liabilities. Current and deferred income tax may have to be recognized going forward.

Restriction to credit dividend withholding tax for portfolio corporate shareholders

Background

The dividend withholding tax is considered to be a preliminary levy for
corporate income tax purposes. Under the current tax law, Dutch tax payers can
reclaim the Dutch dividend withholding tax paid on its behalf, regardless the
Dutch corporate income tax liability of the taxpayer in the respective year.

In the 2022 Tax Plan, following-up the EU jurisprudence Sofina, the possibilities to credit dividend withholding tax against the corporate income tax due will be
limited to the extent of the Dutch corporate income tax liability in the respective year.

This limitation to credit dividend withholding tax is only applicable to taxpayers that:

1. are not in a position in which corporate income tax is due, e.g.
   because they suffer losses or are entitled to avoidance of double
   taxation; or
2. are in a position in which corporate income tax is due, but the amount
   concerned is lower than the withholding tax to be credited; and
3. have a shareholding of less than 5% in a Netherlands resident entity
   which is a withholding agent for dividend withholding tax purposes.

If dividend withholding tax cannot (fully) be credited against corporate income tax due in a certain year, the uncredited excess withholding tax can be carried
forward unlimited. If corporate income tax is due in a later year, the corporate
taxpayer first needs to credit the dividend withholding tax of the year
concerned before being entitled to credit the uncredited amounts of previous
years.

Tax accounting impact

• This new legislation may impact the recognition of DTAs on carryforward tax credits therefore a careful assessment may be required to support the probability that the tax credits can be utilized in the future.
  

Tax rate change

Background

In addition to the tax plan presented on 21 September 2021, an additional
expenditure has been agreed in Parliament on 23 September 2021 that
will be financed by the business community. These measures will be
implemented as an amendment of the Dutch Tax Plan 2022. Amongst others,
the highest DCITA rate of 25% will probably increase to 25.8% as per 2022.

Tax accounting impact

• A change in Income Tax rate would require entities to remeasure the
  deferred tax assets and liabilities as of the date of (substantively)
  enactment. Any tax effects resulting from enactment would need to be
  accounted for in the reporting period of (substantively) enactment.
• The effect of the change in tax rate is likely to have an impact on the
  ETR. The higher Income Tax rate of 25.8% compared to previously
  enacted Income Tax rate of 25%, will increase the future tax benefits of
  existing DTAs which could lead to a decrease of the ETR. On the other
  hand, it will also increase the expected future taxes payable from
  the existing deferred tax liabilities (DTLs) which could lead to an
  increase of the ETR.
• Particular consideration should also be given on where the effect of the
  change in Income Tax rate should be recognised, either in profit or loss,
  other comprehensive income (OCI) or directly in equity.

Overview several legislative changes Tax Plan 2021

Loss relief

Background

Currently, Dutch tax law states that tax losses can be carried back 1 year and carried forward 6 years. Under the new tax law (enacted June 4, 2021), the NOL carryback period will remain 1 year and the carryforward period will be unlimited. However, the amount of the NOL utilization will be limited to 50 per cent of taxable income (in excess of EUR 1 million). 

As indicated, the legislation will enter into force on 1 January 2022 and will apply to all tax losses arising as of 1 January 2022, as well as tax loss carryforwards still available at that date.

Tax accounting impact

• As a result of the restriction in the ability to use NOLs up to 50 per cent
  of taxable income (in excess of EUR 1 million), entities with available
  NOLs may still end up in a tax paying position. Consequently, the current
  tax position and cash tax management for entities with available NOLs will become relevant going forward.
• The change in tax law regarding NOL carryforwards is also likely to affect
  the recognition of related deferred tax assets (DTA).
• Finally, the ETR may also be impacted by the modification to tax
  law regarding NOL carryforwards.

Conditional withholding tax on interest and royalty payments (2021)

Background

As per 1 January 2021, the conditional withholding tax act 2021 was implemented. Under this legislation interest and royalty payments are taxed with 25% withholding tax if the payments are made to affiliated
companies that are domiciled in a low tax jurisdiction or in cases of abuse.
A jurisdiction qualifies as a low tax jurisdiction if it has a statutory profit tax
of less than 9% or the jurisdiction is included in the EU list of non-cooperative
jurisdictions.

Tax accounting impact

• Careful consideration should be given where to present this
  withholding tax. Thus an analysis of whether the withholding tax is an
  income tax as defined by IAS 12 may be required.
  

Restriction of liquidation and cessation loss scheme (2021)

The law on limitation of liquidation and cessation loss scheme entered into force on January 1, 2021. Under the liquidation loss regime, a Dutch entity is
under certain circumstances able to deduct losses stemming from a dissolved
subsidiary.

As of 1 January 2021, a threshold of €5 million is implemented for these
liquidation losses (provided that a Tax Treaty has been concluded with the tax
residence of the liquidated company). Losses exceeding the €5 million
threshold can only be offset if (1) the tax payer has a qualifying interest in the
liquidated company, (2) the liquidated company is situated in an EU/EEA state
or a state that falls under the EU association agreement and (3) the
liquidation is completed within three years after the business of the liquidated
entity is discontinued or, if earlier, once the decision for discontinuance was
made.

Tax accounting impact

• An outside basis difference analysis should be performed on a future
  envisaged liquidation of a subsidiary of a Dutch entity in order to
  determine the impact on deferred taxes. This analysis should also
  include a probability assessment whether such outside basis
  temporary difference can be utilized in the future.

Final

Deloitte tax accounting team is happy to assist by assessing the actual impact of
the legislative changes on your financial report. Also for other tax accounting
matters, please feel free to contact us as well.